Bonuses are taxed heavily because the IRS classifies them as "supplemental wages" rather than regular income, triggering a mandatory, flat 22% federal withholding rate (for amounts under $1 million) to ensure enough tax is prepaid. This higher, immediate withholding often makes the net amount feel smaller, although the total tax owed is reconciled when filing annual tax returns.
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.
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.
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.
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.
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.
If you haven't reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings. In the case where you've already maxed out your 401(k) contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.
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.
For a higher rate taxpayer, a £10,000 bonus will instantly be whittled down to £6,000 by income tax. National insurance at 2% would take a further £200, leaving you with just £5,800 of your £10,000 bonus. However, there is a way to (legally) reduce the tax you pay on your bonus, and that's with bonus sacrifice.
On average, bonuses can range anywhere from 5% to 15% of an employee's annual salary. For instance, if you're earning $60,000 a year, your bonus could be between $3,000 and $9,000. In some sectors—like finance or tech—bonuses might soar even higher due to competitive practices aimed at retaining top talent.
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.
If you are deferring income into a retirement plan, such as a 401(k), a portion of the bonus may be withheld for that as well. While there's no eliminating the tax burden of a bonus altogether, you might be able to lower it. Here are some ways to reduce the sting of taxes from your bonus: Reduce your taxable 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.
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 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.
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.
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.