Yes, bonuses count as taxable income and are included in your total income for the year. They are considered supplemental wages by the IRS and are subject to federal, state, Social Security, and Medicare taxes. Bonuses are generally reported on your W-2 in Box 1, just like regular wages, and can affect your overall tax liability.
For example, if you earned an income of £50,000 and were entitled to a bonus of £10,000 and you didn't sacrifice any of it, your net income after tax and NI deductions would be £45,357.40.
The Gross-up Method: The bonus is processed with grossed up wages. This method will increase the gross amount to offset the income taxes for Social Security, Medicare, Federal, State, and Local taxes, so that the employee's net bonus amount is a flat amount.
Bonuses paid to you are taxable because they are income under Section 61 and no IRC section excludes them from taxation. However, if you receive fringe benefits – for example, tickets to an event or gift baskets – these may not always be considered taxable.
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.
Bonuses are considered “supplemental income,” which simply means money you earn over and above your regular paycheque. In Canada, this supplemental income is subject to income tax, just like your regular salary. In other words, your regular salary and your bonus are subject to the exact same amount and type of tax.
Things to know about the tax impact of bonuses. By now, you may be wondering, “Why are bonuses taxed so high?” It's because the IRS considers bonus pay to be supplemental income. Therefore, the IRS treats it differently than standard income.
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.
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.
Employee Satisfaction Can Be Negatively Impacted
Bonuses can push employees to work harder and improve their work ethic. This pressure can become too much and they give up as their goal is out of reach, which drastically decreases their job satisfaction and productivity.
The IRS considers bonuses to be supplemental income and taxes them at a flat withholding rate of 22% (a higher rate applies to bonuses over $1 million). Your employer can tax your bonus in one of two ways — the percentage method or the aggregate method.
CPA Tip: Some employers opt to gross up the bonus by calculating a higher bonus amount so the employee receives a specific net amount after taxes. Remind your clients that this can be an appreciated gesture, but it increases the employer's payroll tax liability and must be carefully calculated.
Employees qualify for a minimum or maximum bonus based on the gross salary earned. A minimum bonus applies if the gross monthly salary is equal to or less than ₹7,000 per month. A maximum bonus applies if the gross monthly salary is greater than ₹7,000 per month.
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.
In many cases, recipients of bonuses pay a 22% flat federal income tax, along with a 6.2% Social Security tax and 1.45% Medicare tax. Fortunately, you can reduce the tax burden of a bonus by, for example, putting at least some of the money in a 401(k), IRA or health savings account.
The bonus is added to your total annual income and taxed according to Canada's progressive tax system, where higher income levels have higher tax rates. Therefore, a big bonus pay may push some of your income into a higher tax bracket and result in a higher effective tax rate on that portion of income.
For a $70,000 income in Canada (using 2025 rates), you'll pay roughly $13,000 to $20,000 in total taxes (federal, provincial, CPP, EI), depending on your province, resulting in a take-home pay around $50,000-$59,000, with federal tax around 14.5% or 20.5% depending on the portion, plus provincial tax and deductions like CPP and EI.
You may be wondering if the bonus you receive at work is subject to special tax treatment. Unfortunately it isn't, and you must include your bonuses on your tax return. This will inevitably increase your adjusted gross income, or AGI—which can potentially increase the amount of tax you owe.