Bonuses are not technically taxed twice, but they are often withheld at a higher rate (usually a 22% flat federal rate) because the IRS classifies them as "supplemental wages". They are treated as ordinary income and, while the initial withholding may feel high, they are ultimately taxed just like regular wages on your final tax return.
Bonuses are considered wages and are taxed the same way as other wages on your tax return. However, the IRS doesn't consider them regular wages. Instead, your bonus counts as supplemental wages and can be subject to different federal withholding rules than your regular wages when your get paid your bonus.
Bonuses under $1 million are typically taxed at a flat rate of 22%. Example: If you receive a bonus of $20,000, the flat federal tax rate of 22% would amount to $4,400. If you receive a bonus above $1 million, you'd pay the 22% rate on the first million. Beyond that, the rate jumps to 37%.
You can't entirely avoid taxes on a bonus, but you can significantly lower the amount by contributing to tax-advantaged accounts (401(k), IRA, HSA), deferring the bonus to a year you expect to be in a lower tax bracket, or making charitable donations, thereby reducing your taxable income or increasing deductions at tax time.
Bonus contributed pre-tax to super
For example, tax on a $50,000 bonus: Paid to you and your marginal tax rate is 32.5% = $16,250. Paid to you and your marginal tax rate is 37% = $18,500.
One of the most notable differences between bonuses and raises is the duration of the compensation. Bonuses are one-time, short-term financial rewards. A raise is an increase to your current salary for the foreseeable future and provides more long-term benefits.
Tax withholding on bonuses
For federal taxes, when an employee receives $1 million or less in supplemental wages during 2025 and those wages are identified separately from regular wages, the flat withholding rate is 22 percent.
It's possible that a bonus or a pay increase can put you in a higher tax bracket. That means you will pay a higher tax rate on each additional dollar you earn. Some people think they may actually have less after-tax income because of a bonus, but this is not true.
If you haven't reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings. In the case where you've already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.
It's not an obvious move, but you might want to try deferring your bonus, if it makes sense. The point of deferring your bonus is to push any tax payments on it into the next year. So if you usually receive a bonus in December, you might be able to push it a few weeks, if you ask your employer.
National Insurance contributions (NICs) are also payable on bonuses. For example, if you earn £40,000 annually and receive a £4,000 bonus, it could be taxed at 20% (basic rate) and 8% for NICs, leaving you with significantly less in take-home pay.
Because your bonus increases the total amount for that pay period, it might temporarily move you into a higher tax bracket — meaning more tax is withheld upfront. However, this doesn't necessarily increase your total tax bill for the year; your final tax liability is determined when you file your return.
Impact of a bonus taking your earnings over 100k
Let's say you earn a £100k salary and – good news – you've been awarded a £1,000 bonus. Ready for the bad news? Not only will this bonus be taxed at 40% (leaving you with £600), but you also lose £500 from your tax-free personal allowance.
If you want to know how to avoid taxes on a bonus check, here are a few strategies:
Bonuses are usually taxed on both the federal and state levels, which means you have to report and pay taxes on your bonuses twice. However, supplemental income tax rules and rates can vary depending on the state you're in.
Percentage Method (Most Common) – The IRS requires a flat withholding rate of 22% for bonuses under $1 million (as of 2025). This means your employer will typically withhold 22% of your bonus for federal income taxes—regardless of your actual tax bracket.
In California, bonuses are taxed differently from regular income. They are considered supplemental income and are subject to both federal and state taxes. California uses a flat rate for state tax on bonuses, distinct from regular income tax rates.