Bonuses are taxed at a high rate (often ~40% combined) because the IRS classifies them as "supplemental income". Employers usually withhold a flat 22% for federal taxes, plus Social Security, Medicare, and state/local taxes. This high withholding is designed to prevent underpayment, and any excess is usually refunded when you file your tax return.
No, bonuses are not typically taxed at a 40% rate. Federal taxes on bonuses often use a 22% flat rate under the percentage method. The IRS also allows employers to use the aggregate method to calculate federal income tax on bonuses. State and local taxes can also alter the final rate.
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.
Why is tax withholding on bonuses so high? 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.
Here's an overview of each strategy and how it might reduce taxable income and help you avoid moving into a higher tax bracket.
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Change your W-4
By updating your W-4 (tax withholding form) with your employer and changing your withholding allowances, you can help ensure the right amount of tax is taken out of your regular paycheck. This can help lessen the impact of a large tax hit when you receive a bonus.
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 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.
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.
The general rule is that employees are taxed at the rate of the marginal tax bracket in which they fall. Let's explain: if their salary is between R 1 and R 216 200, they are in the 18% tax bracket and therefore their bonus will be taxed at 18%.
An annual salary of $50,000 is considered a middle-class income, and can be a comfortable wage for a recent graduate or a person starting a new career. A single person may not be able to live large in some areas of the country, but that doesn't mean they can't live comfortably elsewhere.
Different income tax brackets apply depending on how much money you make. Generally speaking, a higher percentage is typically taken out of your paycheck if you earn a higher level of income.
The IRS 7-year rule primarily applies to keeping records for claiming a deduction for bad debts or losses from worthless securities, allowing a longer period to file for a credit or refund, but it's not a universal audit limit; it's often a recommended safe buffer for general record-keeping, with the standard IRS audit period usually being 3 years, extending to 6 years for substantial income omission (over 25%) or foreign income issues, and indefinitely for fraud.
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.
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%.