An employee gets a $2,000 bonus and opens the check to find $1,360. They come to you sure something’s broken, because almost half seems gone and someone told them bonuses are “taxed higher.” Nothing’s broken, and bonuses aren’t taxed at a special higher rate. What happened is withholding, and it’s one of the easiest payroll conversations to get right once you understand it yourself.
The short answer
A bonus is “supplemental wages,” and the IRS lets you withhold federal income tax on it at a flat 22% (up to $1 million a year per employee). That 22% is withholding, not the final tax. The bonus is ordinary income, taxed at the employee’s normal rates when they file, so over-withholding comes back as a refund and under-withholding is owed.
Bonuses aren’t taxed at a higher rate
This is the myth worth killing first. There is no special, punishing “bonus tax.” A bonus is income, taxed exactly like the rest of an employee’s income when they file their return.
What makes a bonus feel taxed harder is the withholding method. A separate bonus check often has a flat 22% pulled for federal income tax, which can be more or less than the employee’s real rate. If their actual bracket is lower, the extra comes back at tax time. The money isn’t gone. It’s parked with the IRS until the return trues it up.
The two ways to withhold
The IRS gives employers two approved methods for withholding federal income tax on a bonus.
The flat percentage method. Withhold a flat 22% on the bonus, straightforward and separate from regular pay. If a single employee’s supplemental wages pass $1 million in a year, the portion above $1 million is withheld at 37%, the top rate. For a small business this is the simpler, more common choice, especially for a standalone bonus check.
The aggregate method. Combine the bonus with a regular paycheck, then withhold on the total as if it were one bigger paycheck, using the employee’s W-4. This can track their real rate more closely, but it’s fiddlier, and it often withholds more on the spot because the combined amount lands in a higher withholding tier.
Either is allowed. Most small employers use the flat 22% for a clean, separate bonus.
Don’t forget the rest of the withholding
The 22% headline is only the federal income tax piece. A bonus is wages, so it also gets:
- FICA: 7.65% for Social Security and Medicare, same as any paycheck (Social Security stops once the employee passes the annual wage cap)
- State income tax, if your state has one, often at its own supplemental rate
So on that $2,000 bonus, the 22% federal ($440) plus FICA ($153) plus any state tax is why the take-home landed where it did. If the mechanics of those deductions are fuzzy, gross pay to net pay walks through each one.
What owners get wrong
Calling it a “bonus tax rate.” It’s a withholding rate. Saying it wrong is what makes employees think they were penalized for good work. The right explanation: “22% is what the IRS has us hold back for federal tax, and it evens out when you file.”
Handing a contractor a “bonus.” Extra pay to a 1099 contractor isn’t a payroll bonus and isn’t withheld this way, it’s just more contractor income. If you’re unsure whether someone is even an employee, that’s the W-2 or 1099 question first.
Grossing up without meaning to. If you want an employee to net a round number (say, take home exactly $1,000), you have to “gross up,” calculating a larger bonus so that after withholding the take-home hits your target. Decide that on purpose, not by accident.
The takeaway
Bonuses are ordinary income. The 22% you see is withholding the IRS asks you to hold back, not a special tax and not the final bill. Run it with the flat method for simplicity, remember FICA and state still apply, and give your team the one-sentence explanation so a reward doesn’t feel like a penalty.
Want help setting up a bonus run, or figuring out a gross-up so the take-home lands where you want? Book a free intro call and we’ll get it right.
This is general education, not tax advice for your specific situation. Supplemental withholding rates and thresholds can change, so confirm the current figures before you run a bonus.
Frequently asked
Why was 22% withheld from my employee's bonus?
Bonuses are supplemental wages, and the IRS lets employers withhold federal income tax on them at a flat 22% (up to $1 million a year). That 22% is withholding, not the final tax on the bonus. The actual tax is settled on the employee's annual return based on their total income.
What are the two ways to withhold tax on a bonus?
The flat percentage method withholds a flat 22% for federal income tax (37% on any amount over $1 million in a year). The aggregate method combines the bonus with a regular paycheck and withholds based on the employee's W-4. Both are allowed; the flat method is simpler and more common for a separate bonus check.
Do bonuses get hit with Social Security and Medicare too?
Yes. A bonus is wages, so it's subject to the same 7.65% FICA (Social Security and Medicare) as regular pay, plus any state income tax. The flat 22% you hear about is only the federal income tax withholding piece, not the whole story.