To minimize taxes on a large bonus, immediately contribute a significant portion to tax-advantaged accounts like a 401(k), traditional IRA, or Health Savings Account (HSA) to lower your taxable income. Other strategies include deferring the bonus to the next tax year or increasing other deductions.
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.
Some people like to deposit their bonus directly into an RRSP. If your employer does this, then there's no tax withholding. And the benefit is that you don't have to wait for a tax refund to start investing the amount.
The federal bonus tax withholding rate is typically 22%. However, employers could instead combine a bonus with your regular wages as though it's one of your usual paychecks—with your usual tax amount withheld. There are ways to reduce the tax impact of your bonus.
How can you lower taxes on bonuses?
Ultimately, the best decision depends on personal income levels, tax brackets, and the company's financial situation. Those in lower tax brackets may benefit from a salary bonus, while high earners typically find dividends to be the more tax-efficient choice.
“Consider keeping some cash on the side to pay tuition, fund a 529 college savings plan, or establish an education trust,” Murphy advises. Alternatively, use your bonus to fund a risk management strategy, buying life insurance, annuities, or a long-term care policy.
Impact of a bonus taking your earnings over 100k
Not only will this bonus be taxed at 40% (leaving you with £600), but you also lose £500 from your tax-free personal allowance. To add insult to financial injury, that £500 will also be taxed at 40%, costing you another £200.
Here are nine ways to use a bonus to extend its benefits into the new year and beyond.
The benefits of bonus sacrifice
The main benefit of paying your bonus into your pension is tax relief. If you take your bonus as cash, this will be subject to income tax, National Insurance contributions and maybe other deductions (such as student loans).
The withholding rate for supplemental wages is 22 percent. That rate will be applied to any supplemental wages, such as bonuses, up to $1 million during the tax year. If your bonus totals more than $1 million, the withholding rate for any amount of the bonus above $1 million is 37 percent.
Paying yourself a salary builds Registered Retirement Savings Plan (RRSP) room and boosts mortgage eligibility but comes with more admin and higher Canada Pension Plan (CPP) costs. Dividends are simpler and can be more tax-efficient but don't create RRSP room or count as earned income.
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.
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.
4 steps to lowering the tax liability of a bonus
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.
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.
To calculate tax on a bonus, you first need to determine which income tax brackets the employee falls under. According to Revenue Canada, these are Canada's federal income tax rates for 2021: 15% on the first $49,020. 20.5% on the next $49,020.