The most common belief about bonuses, that they are taxed at some special higher rate, is wrong. A bonus is ordinary wage income taxed at exactly your normal brackets. What is different is the withholding, and depending on your income, that difference either hands the IRS an interest-free loan or leaves you with a surprise bill in April.
The flat 22% withholding rule
Payroll treats bonuses as supplemental wages. When a bonus is paid separately from your regular check, the IRS lets your employer withhold federal tax on it at a flat 22%, and nearly every employer takes that option because it is the simplest. The rate is the same whether you earn $40,000 or $700,000. Only supplemental wages beyond $1 million in a year must be withheld at 37%.
Add Social Security, Medicare, and state withholding, and the bonus check can shrink by a third or more. That shrinkage is what people misread as a special bonus tax. At filing time the bonus is simply added to your other wages, taxed at your brackets, and the withholding is credited like any other. Anything over-collected comes back as refund.
How the 22% rate compares to your bracket
- In the 10% or 12% bracket, the flat rate over-withholds. You get it back at filing, but the IRS held your money all year.
- In the 22% or 24% bracket, it lands close enough. No action needed.
- In the 32% to 37% brackets, every bonus is under-withheld by 10 to 15 points. A $100,000 bonus at a 35% marginal rate leaves roughly $13,000 uncollected. Nothing sends that to the IRS until you do.
When the gap becomes a penalty
The IRS expects tax during the year, not in April. If under-withheld bonuses leave you owing $1,000 or more at filing, the underpayment penalty can apply on top of the bill. The same math hits RSU vests, which payroll treats identically.
The fix is either a new W-4 with extra per-paycheck withholding, or quarterly estimated payments. The safe harbor rule gives you a guaranteed-safe target. Reach 110% of last year's total tax (100% for prior-year AGI of $150,000 or less) and no penalty can apply no matter how big the bonus year gets.
Check whether your bonus leaves a gap
Enter your pay and withholding and see whether you are covered or heading for a balance due in April, free.
Sources: IRS Publication 15 · IRS Publication 505