Bonuses are taxed higher because the IRS classifies them as "supplemental income," requiring employers to withhold taxes at a higher flat rate—usually 22% for federal taxes—rather than your normal income tax bracket. If your total annual compensation is high, or if your employer used the "aggregate method," the withholding can easily reach 35% or higher when combining federal, state, Social Security, and Medicare taxes.
The percentage method
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.
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.
Section 35 of the Income Tax Act allows a deduction of 150% of expenses incurred for scientific research. This includes payments to approved entities like National Laboratories, Universities, and IITs for scientific research.
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.
National Insurance contributions (NICs) are also payable on bonuses. For example, if you earn £40,000 annually and receive a £4,000 bonus, it could be taxed at 20% (basic rate) and 8% for NICs, leaving you with significantly less in take-home pay.
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.
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.
Bonuses are considered supplemental wages. Employers often use a flat rate to withhold on supplemental pay. This obviously differs from your normal withholding rate. It's just a classification difference.
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%.
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.
Bottom Line. Year-end bonuses are subject to taxation like any income received from an employer. Some strategies can help manage or reduce the taxes owed on a year-end bonus, however. Some of these require donating to charity or making a contribution to a retirement or health savings account.
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.
35% Bracket: The 35% bracket is for even higher incomes. For single filers in 2025, it applies to incomes between $250,525 to $626,350. For married couples filing jointly, the range is $501,050 to $751,600. Income in this bracket is taxed at a 35% rate.
The legal basis for withholding tax
Section 35A of the Income Tax Act places a legal obligation on a purchaser of property – via the conveyancer – to withhold a portion of the purchase price in certain instances, i.e. when the seller is a non-resident and the purchase price exceeds R2 million.
The purpose of section 35 has been stated in many ways over the years. At its core, section 35(1) serves to recognize the prior occupation of Canada by Aboriginal societies and to reconcile their contemporary existence with Crown sovereignty (Desautel, SCC).