The IRS rules governing how supplemental wage payments like bonuses are taxed, either at a flat 22% federal withholding rate (37% over $1 million) or aggregated with regular wages and withheld at the employee's effective rate.
Why bonus taxation matters for employers
Bonuses are supplemental wages, and the IRS gives employers two methods for withholding federal income tax on them. The first is the flat rate method: withhold exactly 22% federal income tax on the bonus amount, regardless of the employee's regular withholding rate. This is the most common approach and the simplest to administer. If the bonus plus any other supplemental wages paid to the same employee in the calendar year exceed $1 million, the rate jumps to 37% on the excess above $1 million. The second is the aggregate method: add the bonus to the employee's most recent regular paycheck, calculate withholding on the combined total as if it were a single payment using the W-4 withholding instructions, then subtract the withholding already taken from the regular paycheck. The result is a withholding amount that reflects the employee's actual marginal rate rather than the flat 22%. Employers choose the method and apply it consistently for each bonus payment, though they may use different methods for different bonus payments in the same year. Regardless of the income tax withholding method chosen, Social Security and Medicare taxes always apply to bonuses at the regular rates: 6.2% Social Security (up to the annual wage base) and 1.45% Medicare, plus the 0.9% Additional Medicare Tax for employees earning over $200,000. State bonus withholding rules vary, with some states requiring a flat rate similar to the federal approach and others requiring the aggregate method.
How BEG handles Bonus Taxation for clients
BEG Managed Payroll handles bonus payroll runs with correct federal and state supplemental wage withholding applied. Whether you run off-cycle bonus payments or include bonuses in the regular payroll, BEG calculates withholding correctly and files the corresponding 941 deposits on time. Bonus payroll runs are included in BEG's fully managed payroll service at $25-$45 per employee per month. Learn about BEG Managed Payroll.
Frequently asked questions
Should I use the flat rate or aggregate method for bonus withholding?
The flat rate method at 22% is simpler and sufficient for most situations. The aggregate method is better when an employee's marginal rate is well below 22% and you want to avoid over-withholding. For high earners, the aggregate method may result in more accurate withholding than the flat rate.
Are bonuses subject to Social Security and Medicare taxes?
Yes. Bonuses are wages for FICA purposes. Social Security tax at 6.2% applies up to the annual Social Security wage base. Medicare tax at 1.45% applies to all wages with no cap, and the 0.9% Additional Medicare Tax applies to wages over $200,000.
What happens if I forget to withhold taxes on a bonus?
The bonus is still taxable income for the employee, and the employer is still liable for the employer share of FICA. The employee will owe the under-withheld income tax when they file their return, but the employer may owe penalties for failure to deposit and failure to withhold.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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