How Are Bonuses Taxed? Bonus Tax Rate, Percentage & Calculation Explained!

Do you also think that the bonus tax rate is higher than the regular income tax rate? Well, that is not the case: Bonuses are just taxed differently from regular salaries sometimes, but not at a higher rate. Many have confusion around the bonus tax mechanism, such as “Are bonuses taxed at a higher rate?” “How much tax is deducted on bonuses?” and many more.. 

This article doesn’t just cover bonus tax rates and computation methods, but also provides explanations through real-life examples. A complete comparison of the overtime tax rate is also provided with the bonus tax rate. Furthermore, the final section lists and dispels the most common myths.     

How Are Bonuses Taxed?

There are two methods of withholding taxes on the bonuses, namely the percentage method, also known as the flat rate method, and the aggregate method.

Bonuses are payments made by employers to employees in addition to the monthly fixed wages or salaries. Thus, they are seen as different income sources. Such extra payments on top of wages are categorized as “Supplemental Wages” by the IRS, i.e., Internal Revenue Service. 

Many people have this misconception that a bonus tax rate is higher than the income tax rate. However, that is not true. It can only feel that way on the surface when the bonus tax is withheld differently (or calculated separately).   

Like your income tax, your employer will also withhold taxes on the bonuses earned by you, to finally submit the amount to the IRS authorities on your behalf. 

What Is the Bonus Tax Rate in the US?

The bonus tax rate in the US basically depends on the chosen method by an employer. If the tax amount on bonus is calculated through the percentage method, 22% is the rate for a bonus not exceeding 1 million, or 37% for any higher amount. Furthermore, under the aggregate method, the bonus is combined with the regular pay of the concerned month, and then taxed based on the regular income tax rate. 

Hence, if you ask, “Do bonuses get taxed separately?”, the answer is yes, but only if an employer has chosen the percentage method. Many businesses that have recently been incorporated often hire accounting services for startups to delegate and save themselves from the hassle of managing intricacies related to supplemental wage tax withholding.    

Also Read: What is Receivables Financing? Why is Accounts Receivable Financing Important for Businesses?

What are the Two IRS Methods Used to Tax Bonuses?

If you ask, “How are bonuses taxed?”, there are two methods for an employer to choose from with respect to bonus tax withholding, namely the flat rate method (percentage method) and the aggregate method, as explained below.  

Flat Rate Method

Also known as the percentage method, if this option is selected, the employer has to withhold 22% out of the bonus as the tax amount. Here, a bonus is treated as a separate source of income and thus taxed differently or separately. 

However, the flat rate method is subject to an exception. The bonus tax rate is 22% only as long as the bonus amount doesn’t exceed the one-million limit in a calendar year. When the bonus exceeds one million, the withholding reaches 37%. 

Aggregate Method

In this method, the tax withholding for bonuses isn’t calculated separately, but along with the regular pay of the concerned month. A gross total is calculated by adding the bonus to the monthly wage, and then, as per the regular/federal income tax rate, the deduction is determined.

This method is more suitable when employees receive supplemental income or wages throughout the year, for example, commission-based extra earnings without a pre-determined limit every month. 

Key Point: Under the aggregate method, the withholding is figured using the standard IRS publication 15-T (Federal Income Tax Withholding Methods) withholding tables, based on the concerned employee’s W-4 information. 

Bonus Tax Rate Examples

Consider the following bonus tax rate examples to have a better understanding of the calculations. Here, we have also included the percentage method in detail, where all the bonus amounts are to be adjusted separately or differently. So, that will also clarify the most common doubt: “Are bonuses taxed differently?”  

1. Percentage (Flat Rate) Example 

   The following table includes both instances of one-million and more-than-one-million-dollar bonuses, which are the two major categories under this flat-rate method. 

   S. No.	Bonus Amount	Calculation	Federal Tax Withheld
   1.	$10,000	$10,000 x 22%	$2,200
   2.	$20,000	$20,000 x 22%	$4,400
   3.	$1.5 Million	($1M x 22%) + ($500K x 37%)	$220,000 + $185,000 = $405,000

2. Aggregate Method Example 

   In this method, the bonus is combined with the monthly pay, creating an aggregate. And then, out of this aggregate or combined sum, the withholding is determined according to the applicable income tax bracket and the employee’s information in the form W-4.  

   Particulars	Figures
   Monthly Income	$20,000
   Bonus	$1,500
   Aggregate	$21,500
   Applicable Tax Bracket	27%
   Total Tax Withholding	$5,805

Note: These examples are rough approximations of the real-life adjustments, only focusing on the bonus tax rate and the withholding, without considering other deductions, which might be applicable in addition to the income tax, such as social security, Medicare, and state/local taxes. Hence, if you calculate bonus after tax according to these tables, the figure is bound to be higher than the actual bonus after tax in your real life. 

Also Read: Biweekly Pay: Learn How to Calculate Biweekly Pay, Along with Its Advantages and Challenges 

How Much Are Bonuses Taxed in Total?

If you are the one who wants to learn “How much are bonuses taxed?” in total, this section is for you. Here, we will discuss other aspects of the total tax on your overall bonus amount. These aspects include Federal Income Tax, Social Security Tax Percentage, Medicare Tax, and State & Local Taxes. 

1. Federal Income Tax: This tax applies to the bonus in two different ways, namely, the percentage method and the aggregate method. Both these are amply discussed above with examples. The withholding in the aggregate method totally depends on the tax bracket applicable to the concerned employee.  

2. Social Security Tax Percentage: This tax is applied to the bonus at the fixed rate of 6.2% from the wages as well as bonuses. Now, the base limit for this tax scheme has been increased to $1,84,500, as per the Social Security Administration (SSA). That means this tax of 6.2% is only applicable when your annual earnings are up to the aforementioned figure, and more!

3. Medicare Tax: For the medical facilities and benefits, a flat 1.45% is deducted from the bonus as a Medicare tax. There is no wage base limit, and an additional 0.9% is withheld when the annual wage exceeds $200,000.   

4. State & Local Taxes: Such taxes also apply to the bonus, but the rules and rates are subject to variations from one location to another. For example, California has a 10.23% flat rate on bonuses. 

Hence, when you calculate bonus after tax as listed here, the final net amount will be smaller than the initial amount. 

And, just to relate to the context, the size of your bonus also impacts the amount of withholding. For example, a bonus of more than one million is taxed at the flat rate of 37% under the percentage method, whereas the rate is 22% for a bonus of under a million. So, it is also a crucial aspect that makes the tax seem bigger!    

Also Read: UK Tax Year: A Branded Guide to Stay Compliant with Tax Regulations

Are Bonuses Taxed Higher Than Regular Pay?

Are bonuses taxed higher than regular pay? The answer is no.  Bonuses aren’t taxed at a higher rate than the monthly wage. However, it might feel that way primarily due to the withholding method chosen by your employer. 

In the percentage method, this perception may dominate because the bonus amount is taxed separately as an additional or supplemental wage. Well, that also answers if you ask, “Are bonuses taxed differently?” 

Furthermore, in the aggregate method, the tax might appear to be higher because the addition of the bonus to the regular monthly pay pushes the total amount to the higher salary bracket. As a result, a higher tax rate applies to the employee. This also causes an employee to think that the bonuses are taxed at a higher rate than the regular pay. 

However, that is not true in that case as well, because if there is any instance of tax overpayment, the authorities can be made to refund the amount through the filing of the annual tax return. 

So, at whatever rate your bonus is taxed, it is always right and legitimate, as long as it complies with the legal rules and regulations.   

Bonus Tax vs. Overtime Tax Rate

There aren’t two separate ways to calculate tax bonus and overtime amounts. Or, in other words, there are no other overtime tax rates than the ones used for taxing bonuses. There is only one taxation system that applies everywhere. The following table summarizes how it works briefly. 

S. No.	Feature	Bonus Pay (how much is taxes on a bonus)	Overtime Pay(how much is overtime taxed)
1.	IRS classification	Supplemental wages	Regular or supplemental wages ***based on the calculation method
2.	Withholding Method (Common)	Percentage method: a flat rate of 22% applies here for bonus tax withholding when the bonus amount is one million or under the limit. Otherwise, the rate stands at 37%	Aggregate method: Combined with the regular pay, and then a portion is withheld as per the W-4 form and standard IRS wage bracket tables
3.	Withholding Method (Alternative)	Aggregate method: the bonus is combined with the wage, and then the withholding is calculated out of the total aggregate, considering the employee’s W-4 information and standard tax tables, provided by the IRS	Percentage method: a sum equal to 22% will be withheld
4.	Social Security & Medicare Taxes	6.2% (Social Security) + 1.45% (Medicare Taxes)	The same treatment as with the bonus

Bonus After Tax Calculator – What to Know!

A bonus after tax calculator helps you estimate how much money you are going to take home out of your original bonus once the total withholding has been set aside, according to the applicable bonus tax rate, and other factors such as social security, Medicare, state/local taxes, etc. 

The bonus and tax calculator is used by employers and employees alike. It is the ultimate tool to learn about the size of the withheld amount from the bonus earnings. Without this, the employer will have to go through the hassle of calculating taxes manually. Its availability makes the process faster and less prone to errors. 

This calculator can also benefit the employees by allowing them to compute their withholdings themselves in advance, independently of their employers. Otherwise, they would have to wait for the information when provided by employers through formal channels of communication.  

Also Read: What is Additional Paid in Capital? — Its Definition, Calculation, and Importance

Common Myths About Bonus Taxation

Many people ask, “Are bonuses taxed?” Well, yes, they come under the taxable supplemental wages. Other common myths that are surrounded by the bonus taxation are that bonuses are taxed at a higher rate, the amount withheld is the actual tax, there is a legal way to skip taxes on the bonus, and bonuses aren’t subject to social security and Medicare taxes. Consider what is true with respect to each of these myths below. 

1. Myth: Bonuses are taxed at a higher rate than regular income. Reality: They are taxed at the same rate as the regular monthly wage.   

2. Myth: The amount withheld from a bonus is the actual tax. Reality: A bonus tax withholding is just an estimate. The actual figure is only learned when you file your tax return on an annual basis. 

3. Myth: There is a legal way to receive a bonus without bearing a tax payment. Reality: The earnings through the bonus are always taxable, recognized as supplemental wages under the IRS tax regime.   

4. Myth: Bonuses are not subject to Social Security and Medicare taxes. Reality: Every bonus is subject to such taxes, including state and local taxes.

If you have other queries related to the tax liability, connect with a professional for year-end accounts services.  

Conclusion

Bonuses are treated as supplemental income for tax purposes. And, it is a common misconception that the bonus tax rate is higher than that of the regular wage. Instead, bonuses are just withheld differently under the percentage method. 

However, in the aggregate method, the bonus is combined with the regular wage before computing the withholding. Both these methods only calculate estimates, as the actual tax amount is only settled during the annual tax return filing. If the taxpayer has overpaid, the excess is simply refunded.  

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