Why Is My Bonus Taxed So High? The Real Explanation
Understand why your bonus withholding looks so large, why you probably get most of it back at tax time, and how to estimate your actual bonus take-home.
The Flat Rate Method (What Most Employers Use)
Most employers withhold federal income tax from bonus payments using the supplemental wage flat rate method, which requires withholding 22% for federal income tax on bonus amounts up to $1 million. This is a fixed rate set by the IRS for supplemental wages, regardless of your actual income tax bracket.
On top of the 22% federal flat rate, your employer also withholds Social Security (6.2%), Medicare (1.45%), state income tax, and any applicable local taxes. Combined, the withholdings on a bonus can easily reach 35% to 45% of the gross amount, which is why a $5,000 bonus might produce only $2,750 to $3,250 in your paycheck.
It feels like you are being taxed at an unfairly high rate, but this is a withholding issue, not an actual tax rate issue. Withholding is not your final tax. Your true tax on the bonus is determined when you file your annual tax return based on your total income for the year.
Why It Looks Like More Tax Than Your Regular Pay
Your regular paycheck withholding is calculated on a per-pay-period basis and is designed to match your full-year income tax liability spread across all pay periods. When a bonus arrives on top of regular pay, the 22% flat rate is applied in addition to your regular withholding for that pay period, which can make the total withholding for that check look enormous.
If your regular paycheck already has taxes withheld based on annualized income that puts you in the 12% or 22% bracket, and then a bonus hits the same paycheck, you might see federal withholding that is 30% or more of the gross for that single pay period. This does not mean you owe 30% on your income — it means withholding was frontloaded in that check.
This is especially jarring for people in lower tax brackets. If your actual federal marginal rate is 12%, the 22% flat rate on your bonus means too much was withheld. That excess withholding comes back to you as a refund when you file your taxes.
You Get Most of It Back (How It Works at Tax Time)
Your bonus is taxed the same as any other ordinary income. When you file your tax return, you report all income — regular wages and bonus — and calculate your total tax liability based on your actual income and deductions. If the total tax withheld throughout the year (from all paychecks including the bonus paycheck) exceeds your actual tax liability, you receive a refund.
A person in the 12% federal bracket who received a bonus with 22% withholding will get that extra 10% of federal withholding back when they file their return. The bonus did not actually cost them 22% — it cost them 12%, which is their actual marginal rate. The refund corrects the over-withholding.
The exception is if receiving the bonus pushes your total income into a genuinely higher bracket. In that case, a portion of the bonus might be taxed at a higher rate than you expected. But even then, the rate applies only to the income that exceeds the bracket threshold, not to the entire bonus.
How to Estimate Your Bonus Take-Home
To estimate your net bonus, start with the gross bonus amount. Subtract 22% for federal income tax withholding (for bonuses under $1 million). Subtract 6.2% for Social Security if you have not yet hit the annual wage base. Subtract 1.45% for Medicare. Subtract your state income tax rate applied to the bonus amount.
For someone in California with a $3,000 bonus: 22% federal is $660, 6.2% Social Security is $186, 1.45% Medicare is $43.50, and California state income tax at roughly 9.3% is $279. Total withholding is approximately $1,169, leaving a net bonus of about $1,831.
If you want to plan for what you will actually keep after your tax return, estimate your true marginal federal and state rates rather than the withholding rates. If your real marginal federal rate is 12%, substitute that for the 22% withholding rate in the calculation. The difference between 12% and 22% is what you expect to recover in your tax refund.