Reducing taxes on bonuses is achieved by lowering your taxable income through pre-tax contributions, such as maximizing 401(k) contributions, contributing to a Traditional IRA, or contributing to a Health Savings Account (HSA). Other strategies include deferring the bonus to the next tax year, requesting a lower withholding rate, or using the bonus to fund charitable donations.
Another common option for helping with current tax liabilities is to contribute to a tax-advantaged account, such as a 401(k), traditional IRA, or Health Savings Account (HSA). If you have one of these accounts, consider using a portion of your bonus to make a qualifying contribution.
Flat-Rate Tax Method Examples
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%.
Since bonuses are paid in addition to your normal paycheck, taxes are withheld at a higher rate than your regular wages. This is because they are considered supplemental 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.
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.
Introduced in House (01/20/2025) This bill allows a tax deduction for bonuses received by an individual, subject to income limitations, through 2029. The amount of the deduction may not exceed 15% of the individual's regular wages from the same employer.
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.
Yes, it is true you are allowed to change your W-4 to ensure less withholdings on your bonus pay. However, the ramifications of such a change may be unknown until tax filing time. Generally, it is better to leave your W-4 alone and have the extra withholdings.
Non-monetary gift bonuses
If you receive a non-monetary gift from your employer every year — a holiday ham, ornament, or even a theater or sporting event ticket — you likely will not be taxed on this gift. This category of gifting is often referred to as “de minimis fringe benefits” and is excluded from your income.
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.
How much does California tax bonuses? California's supplemental wages tax rate is currently 10.23% for bonuses and stock options, and 6.60% for other types of pay.
Percentage method for bonuses
If you receive a bonus separately from your regular paycheck, your employer is probably using the percentage method to calculate how much tax to withhold on your bonus. Here's how that works: The employer withholds 22% of your bonus for taxes if your bonus is under $1 million.
Keep in mind that a bonus may push you into a higher tax bracket. But, you are subject to a higher rate only on the portion of income that falls into that bracket.
Bonus tax rates in 2025
In 2025, the federal withholding rate for supplemental wages is 22%, up to $1 million. It's important to note that this $1 million limit does not include a regular salary income.
4 steps to lowering the tax liability of a bonus