How bonuses are taxed The 22 percent flat rate, the aggregate method, and FICA

Bonuses are supplemental wages

The IRS sorts pay into regular wages and supplemental wages. The Treasury regulation, 26 CFR 31.3402(g)-1, says supplemental wages are all wages an employer pays that are not regular wages. Its examples include bonuses, back pay, commissions, and some overtime pay.

A holiday bonus, a year-end bonus, a signing bonus, and a spot award paid in cash all count. Gifts have their own rules. The IRS de minimis fringe benefits page says cash and cash equivalents are never excluded from income, and neither are gift certificates good for general merchandise.

The tax on a bonus is not higher than the tax on regular pay. Only the withholding method changes. The worker’s real tax is settled on their personal return. What is withholding tax explains the difference.

The two federal rates

IRS Publication 15 for 2026 says the withholding rate on supplemental wages remains 22 percent. It also says the rate is 37 percent once supplemental wages paid to one employee in the calendar year pass $1 million.

The 37 percent rule rarely touches a small employer. The regulation says it applies to the excess over $1 million, at the highest income tax rate for the year, without regard to Form W-4.

When you can use the flat 22 percent

The regulation lets you use the flat rate only if all of these are true:

1. The bonus is not part of the $1 million rule above.
2. You pay the bonus apart from regular wages, or you show it as a separate line in your payroll records.
3. You withheld income tax from the worker’s regular wages this year or last year.

The third point trips people up. If a worker’s Form W-4 claims exempt and you withheld nothing from regular pay this year or last year, you cannot use the flat rate on that worker’s bonus. Use the aggregate method.

With the flat rate, the math is short. A $1,000 bonus gets $220 of federal income tax withholding. That is an example you can redo.

The aggregate method

If you pay the bonus with regular wages and do not list it separately, the regulation says you add them together. Treat the total as one wage payment for the regular pay period. Then figure withholding from the worker’s Form W-4 and the normal tables.

This can withhold more or less than 22 percent on the bonus, depending on the worker’s Form W-4. The tables treat the combined check as if the worker earned that much every pay period. A $3,000 bonus on top of a $2,000 biweekly check looks like a $130,000 salary to the tables for that one check. Either way the tax owed for the year is the same. The worker squares up on their personal return.

Payroll software lets you pick the method when you run a bonus. Read the setting before you click.

Social Security and Medicare still apply

A bonus is wages, so Social Security and Medicare apply as on any paycheck. The IRS Topic 751 page sets the rates: 6.2 percent Social Security and 1.45 percent Medicare from the worker, with a matching amount from you.

Social Security stops at the yearly wage base, $184,500 for 2026 and $192,300 for 2027. A large year-end bonus can push a worker over the cap. 2027 Social Security wage base covers that. Medicare has no cap. The extra 0.9 percent Medicare applies to the worker’s wages over $200,000 in the year.

Federal and state unemployment taxes also apply, up to their wage bases. A worker who has already earned $7,000 from you this year has passed the federal unemployment wage base, so a bonus adds no federal unemployment tax for that worker. Employer payroll taxes percentage shows the full employer share.

One bonus, start to finish

Say you pay a $1,000 holiday bonus on its own check, to a worker who has had income tax withheld all year and is under every cap. These are example figures you can redo.

• Federal income tax at the flat rate: $220.
• Social Security from the worker: $62.
• Medicare from the worker: $14.50.
• State income tax: whatever your state requires.

The worker takes home $703.50 before state tax. You also owe $62 of Social Security and $14.50 of Medicare as the employer.

If you want the worker to take home a round $1,000, you have to gross up the bonus. That means paying more so the net comes out to $1,000. Check whether your payroll plan has a net-pay or gross-up setting.

Vacation pay is different

The regulation treats vacation pay as regular wages for the period of the vacation. Only a vacation allowance paid on top of regular pay for the same period follows the supplemental rules.

State income tax on bonuses

Each state that has an income tax sets its own rule for bonuses. Some use a flat supplemental rate. Others use the normal tables. Texas, Florida, and other states without a wage income tax take nothing. Look at your state’s withholding instructions, or your state page on this site.

Timing a year-end bonus

Payroll taxes follow the date wages are paid. The SSA wage base page, for example, speaks of wages paid in 2027. So a bonus paid December 30, 2026 belongs on the 2026 Form W-2, and the same bonus paid January 4, 2027 belongs in 2027. Year-end payroll checklist lists what else to finish before the last 2026 payday.

Next step

Decide the method, then set the bonus up as its own pay item in your payroll software, so it shows as separate in your records. The methodology page explains how we grade payroll software on the state side. Gusto is one plain link. Patriot is the other service on this site.