Why Bonuses Look So Heavily Taxed
You get a $10,000 bonus. After withholding, you take home $6,500. The breakdown:
- Federal income tax (22% flat): $2,200
- Social Security (6.2%): $620
- Medicare (1.45%): $145
- State income tax (varies): $350–$900
- Total withholding: ~$3,300–$3,800
The IRS requires employers to withhold federal income tax on supplemental wages at a flat 22% for payments up to $1 million. Source: IRS Publication 15 (Circular E) — Source
The 22% Is Withholding, Not Your Actual Tax
If your total income puts you in the 12% bracket, 22% withholding means you were overwithheld — you'll get the difference back as part of your refund.
If you're in the 32% or 35% bracket, 22% withholding means you're underwithheld on the bonus — you'll owe more at filing.
Supplemental wages above $1 million in a single year are subject to mandatory 37% withholding. Source: IRS Rev. Rul. 2008-29 — Source
Strategies to Reduce Bonus Taxes
401(k) contribution: Direct some or all of your bonus to your traditional 401(k) — reduces taxable income dollar-for-dollar, subject to the $23,000 annual limit.
Timing deductions: If you're close to the itemized deduction threshold, a large charitable donation in the same year as your bonus directly offsets the income.
Roth conversion timing: A bonus pushing you into a higher bracket is a bad time for Roth conversions — consider low-income years instead.
See also: paycheck tax calculator, tax withholding calculator, and the tax estimator guide.
Get Started with Avenue to model the after-tax impact of your bonus.