How to Calculate How Much Tax Is Withheld From Your Bonus
Understand the two withholding methods employers use for bonuses, how to estimate your net bonus amount, and what to do with the difference at tax time.
Understand the Two Withholding Methods
The IRS allows employers to use one of two methods when withholding income tax from supplemental wages like bonuses. Understanding which method your employer uses explains why your bonus withholding looks the way it does.
The first method is the flat supplemental rate method, sometimes called the percentage method. The second is the aggregate method, which treats the bonus as part of your regular paycheck. Both produce the same tax due at the end of the year — the difference is only in timing and the appearance of the withholding on your check.
Your Social Security and Medicare taxes are calculated the same way regardless of which income tax method your employer uses. Social Security (6.2%) and Medicare (1.45%) apply to the gross bonus amount, subject to the annual Social Security wage base limit.
The Flat Rate Method Explained
Under the flat rate method, your employer withholds 22% for federal income tax on all supplemental wages up to $1 million per year. This rate applies regardless of your actual tax bracket. For bonuses over $1 million in a year, the rate jumps to 37%.
The calculation is straightforward. Take your gross bonus. Multiply by 0.22 for federal income tax. Multiply by 0.062 for Social Security (if you have not hit the annual wage base). Multiply by 0.0145 for Medicare. Add your state income tax rate. Sum all withholdings and subtract from gross to find net bonus.
Example: a $4,000 bonus with the flat rate method. Federal income tax: $4,000 times 0.22 equals $880. Social Security: $4,000 times 0.062 equals $248. Medicare: $4,000 times 0.0145 equals $58. In a state with 5% income tax: $4,000 times 0.05 equals $200. Total withholding: $1,386. Net bonus: $4,000 minus $1,386 equals $2,614.
The Aggregate Method Explained
Under the aggregate method, your employer adds the bonus to your most recent regular paycheck and calculates withholding on the combined amount as if you received one larger paycheck. This typically results in higher withholding than the flat rate method for people in lower tax brackets.
For example, if your regular bi-weekly paycheck is $1,500 and you receive a $3,000 bonus in the same period, the aggregate method calculates withholding on $4,500 as if that were your regular pay. This might put that paycheck in a higher withholding bracket than your regular $1,500 check.
The aggregate method is more complex for employers to calculate and produces withholding that can look quite high, which is why many employers prefer the simpler flat rate method for bonuses. The IRS permits either approach as long as it is applied consistently.
Calculate Your Expected Bonus Take-Home
To estimate your bonus take-home using the flat rate method: start with your gross bonus. Subtract 22% for federal income tax withholding ($22 per $100 of bonus). Subtract 6.2% for Social Security if you have not yet exceeded the wage base this year. Subtract 1.45% for Medicare. Look up your state income tax rate and subtract that percentage.
Add up all the withholding amounts and subtract from your gross bonus. The result is your estimated net bonus deposit. For a $5,000 bonus: federal $1,100, Social Security $310, Medicare $72.50, and a 6% state tax of $300, totaling $1,782.50 in withholding, leaves an estimated $3,217.50 net.
Remember that this is the withholding estimate, not your actual final tax on the bonus. Your true tax on the bonus will be determined when you file your annual return based on your total income and tax liability for the year.
What to Do With the Difference at Tax Time
If your actual marginal federal tax rate is lower than 22%, you over-paid federal withholding on your bonus during the year. That over-withholding will be returned to you as part of your tax refund when you file.
If you are in the 22% bracket, your bonus withholding was approximately correct for federal income tax. If you are in the 24% bracket, you may owe slightly more than was withheld. Most people are in the 22% or lower bracket for their bonus, making an over-withholding refund the most common outcome.
If you know you will owe additional taxes due to the bonus pushing your income into a higher bracket, consider making an estimated tax payment for the quarter in which you received the bonus. This avoids underpayment penalties if the under-withholding is significant. Your tax professional can help calculate whether an estimated payment makes sense in your situation.