Bonuses are not taxed at a higher rate in Canada, but are taxed as regular income, often resulting in higher immediate withholding tax. This occurs because the lump-sum payment is taxed based on a projected annual income, pushing it into a higher marginal tax bracket. Bonuses are treated as “supplemental income” and are subject to mandatory payroll deductions, such as CPP and EI, just like a regular paycheque.
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.
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.
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 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%.
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.
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.
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.
Bonuses are part of your income and as such they are taxed according to your income bracket, at the same rate as you pay on your regular income earnings.
If you direct your bonus to an RRSP, no taxes will be withheld.
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.
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.
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Your bonus was likely taxed at 32% because employers use special IRS rules for "supplemental wages," often applying a higher flat withholding rate (like 22% or sometimes higher if combined with regular pay in the aggregate method) or pushing you into a higher tax bracket temporarily, but you'll get any over-withholding back as a refund at tax time since bonuses are taxed at your actual income tax rate eventually, not a permanent higher one.
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.
The IRS allows two primary methods for taxing bonuses. The percentage method uses a flat 22% federal tax rate. This method is straightforward but could result in over-withholding for some individuals. The aggregate method combines your bonus with your regular earnings and then calculates taxes based on the total.
But how much are bonuses, usually? This nuanced question troubles many managers who seek to maximize the effectiveness of bonuses for their company. A typical bonus percentage ranges from 1% to 15% of a team member's salary.