Supplemental Wages: What the IRS Calls Bonuses

The IRS treats bonuses, commissions, overtime pay, and other irregular payments as "supplemental wages" — compensation paid in addition to your regular salary. Supplemental wages have their own withholding rules, which is why a $10,000 bonus check often feels like it was taxed at an unusually high rate.

Understanding the withholding rules helps you plan your cash flow around bonuses and avoid filing surprises in April.

The Flat Rate Method (22%)

For supplemental wages paid separately from your regular paycheck (the most common case), employers can use the flat percentage method: withhold a flat 22% for federal income tax regardless of your actual tax bracket. This is simple and fast to calculate, which is why most employers use it.

If you're in the 12% bracket, the employer withholds 22% — meaning you'll get a refund come April. If you're in the 32% bracket, the employer withholds only 22% — you'll owe more at filing. The 22% is just an estimate, not your actual tax rate on the bonus.

The Aggregate Method

Some employers use the aggregate method: they add your bonus to your most recent regular paycheck, calculate withholding on the combined amount as if it were your pay for a full paycheck period, then subtract what was already withheld from your regular check. This typically results in higher withholding than the flat method because the combined amount pushes you into a higher annualized bracket. The aggregate method is more accurate but creates more shock when you see the net bonus amount.

Bonuses over $1 million: Supplemental wages above $1 million in a single calendar year must be withheld at 37% (the top marginal rate). This applies to the amount over $1M — the first $1M can still use the 22% flat rate or aggregate method.

Your Actual Tax on the Bonus

Regardless of withholding method, your actual federal tax on a bonus is determined at year-end when you file. Your bonus is added to your other income, taxed at your marginal rate just like any other income. If your employer withheld more than your actual liability (common with the flat rate if you're in a lower bracket), you get a refund. If they withheld less (common in a high-tax year with a large bonus), you owe the difference.

How to Reduce Bonus Withholding Legally

You cannot tell your employer which withholding method to use for your bonus — that's an employer choice. But you can adjust your regular W-4 withholding to compensate. For example, increase your W-4 withholding in months before you expect a bonus to pre-pay the additional liability, or temporarily decrease withholding after an over-withheld bonus to bring your annual total closer to your actual liability.

State Tax on Bonuses

Most states tax bonuses the same as regular wages at your state marginal rate. A few states have special supplemental withholding rates that differ from regular wage rates — California uses 10.23% flat for supplemental wages; Connecticut uses 6.99%. Check your state's specific rules, but in all cases your actual state tax liability is calculated at filing on total annual income.