The bonus tax myth, debunked
You open your paycheck and your $5,000 bonus has become $2,700. You're furious. "Bonuses are taxed higher!" you tweet. You're wrong — bonuses are withheld higher, not taxed higher. The IRS assumes you might be a high-earner so it withholds at a flat 22% federal supplemental rate, PLUS FICA, PLUS state. At tax time in April, the overpayment comes back as part of your refund. Same total tax. Different timing.
The two bonus withholding methods
- Flat method (most common): 22% federal flat rate on the entire bonus. Simple and what most payroll systems default to.
- Aggregate method: Employer adds the bonus to your regular paycheck and withholds based on total. Usually results in even higher withholding for mid-bracket earners because the combined amount pushes you into higher brackets for that check.
Either way, it reconciles at April tax time. If your true bracket is 22% or lower, flat method withholds roughly the right amount. If your true bracket is 24%+, you'll owe some at April. If your true bracket is 12% or lower, you'll get a refund.
The $1,000,000 supplemental cliff
If your YTD supplemental wages exceed $1,000,000 in the calendar year, federal withholding on the excess jumps from 22% to 37%. Executive comp, large signing bonuses, and RSU vests for tech workers at big companies can trigger this. High-income earners should plan accordingly — but note this is still just withholding; your actual marginal rate may be 35% or 37% and it reconciles.
Strategies to reduce bonus tax impact
- Max your 401(k) with the bonus. Some employers allow pre-tax 401(k) election on bonuses — this avoids the withholding entirely for that portion.
- HSA and FSA deferrals: Pre-tax dollars reduce both the bonus withholding AND your tax bill.
- Time the bonus to a low-income year (sabbatical, job change with gap).
- Donate appreciated stock from prior years to offset bonus income via charitable deduction.