OVERVIEW
Working hard all year to help your company meet its annual goals deserves a reward, and you've definitely earned that bonus. But bonuses count toward your income for the year, so they're subject to income taxes. Read on to learn how much tax you can expect to pay on your bonus—and for tips on reducing your tax liability.
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Key Takeaways • If your employer issues you a stand-alone bonus check, your bonus will be subject to the 22% withholding flat rate if it is $1 million or less for 2022. If your bonus exceeds $1 million, the first $1 million is subject to the 22% withholding flat rate and the amount above $1 million is subject to a 37% withholding flat rate. • If your employer lumps your bonus into your regular pay, standard payroll withholding rules will be applied to it, rather than fixed percentage rules. • Bonuses can be subject to state income taxes as well. These tax rates vary by state. • You may have to pay the 1.45% Medicare tax on your bonus plus the 6.2% Social Security tax on the amount of your wages, including your bonus, that is below the $147,000 Social Security cap (tax year 2022). |
Federal and state taxes
While bonuses are subject to income taxes, the IRS doesn’t consider them regular wages. Instead, your bonus counts as supplemental wages and can be subject to different federal withholding rules. How much your employer withholds from your bonus depends on several factors, but generally if your bonus is equal to or less than $1 million, your bonus will be subject to a 22% withholding flat rate.
Example: If you receive a $6,000 bonus for the year, you'll likely have $1,320 withheld in federal taxes to be sent to the IRS ($6,000 x .22 = $1,320).
Your bonus may also be subject to state taxes, although the withholding rate will vary depending on your state.
If you receive a very large bonus—over $1 million—you'll have 22% federal tax withheld on the first million, then 37% on bonus funds above the first million.
Example: If you received a $2 million bonus, you'd pay $590,000 in federal tax withholding.
- $1,000,000 x .22 = $220,000 tax on first million
- $1,000,000 x .37 = $370,000 tax on second million
- $220,000 + $370,000 = $590,000 total tax
Other Tax Liabilities
In some cases, you might have additional tax liabilities on the income from your bonus. For example, you'll likely have to pay:
- The 6.2% Social Security tax on all of your wages including your bonus that falls below the $147,000 Social Security cap for tax year 2022.
- The 1.45% Medicare tax.
TurboTax Tip: To reduce your tax liability, you can invest your bonus in your 401(k) or IRA. If you expect to retire or take a pay cut in the next tax year, you can ask your employer to defer your bonus until that year begins so it is taxed at a lower rate.
Meeting your tax liabilities
When it comes to actually paying taxes on your bonus, your employer has two options: the percentage method or the aggregate method.
The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22% flat rate—or the higher rate if your bonus is over $1 million.
The aggregate method is used when your employer issues your bonus with your regular salary payment and uses the total amount to calculate the amount of withholding. For example, if you normally withhold 35% of your pay for income taxes, the amount of withholding on your bonus would also be 35%.
Using the aggregate method doesn't mean that you actually have to pay more tax on your bonus. You'd likely qualify for a refund for withholding too much tax money. But it does mean that you could see less of the cash from your bonus upfront.
Use this bonus taxation calculator to figure out how much tax you'd pay on the amount of your bonus using either method, so you can know exactly how much money to expect.
Lowering your tax liabilities
While you can't avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you'll owe at tax time. Use the funds to invest in your 401(k) or IRA to get a tax break.
And if you expect to take a pay cut in the next year—for example, if you're ready to retire—ask your employer to defer your bonus until the following tax year to lower your overall tax liability.
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