How is bonus pay taxed?+
Bonus pay is taxed as ordinary income at your full marginal rate, but withholding is handled differently. Most employers use the IRS supplemental wage withholding flat rate of 22% on bonuses up to $1,000,000 (37% on amounts above). For a high earner already in the 32% federal bracket, the 22% withholding is too low — you'll owe the difference at tax time. For a lower earner in the 12% bracket, the 22% withholding is too high — you'll get part back as a refund. The actual tax you owe is your marginal rate × bonus amount, just like any other wage income.
Why does my bonus look like it was taxed at 40%?+
Because federal supplemental withholding (22%), FICA (7.65%), state withholding (5-10% in most states), and possibly local withholding (1-4% in cities like NYC) stack up to 35-45% of the gross bonus. You haven't actually been taxed at 40% — you've been withheld at 40%. Your actual tax owed depends on your annual bracket. If your marginal rate is 24% federal and your total withholding was 40%, you'll get part of the over-withholding back at tax time (or via a smaller bill if you owe). It's a cash flow issue, not a tax rate issue.
Should I put my bonus in a 401(k)?+
If you're not yet maxing your 401(k) ($23,500 in 2026, $31,000 with age-50 catch-up), routing some or all of the bonus there is usually the highest-leverage tax move. The bonus avoids federal withholding (22%), state tax, AND Medicare (1.45%) on the diverted amount. On a $20,000 bonus diverted to 401(k) for a high earner in 32% federal + 9% state + 1.45% Medicare, that's about $8,500 in tax avoided immediately. Note that Social Security tax (6.2%) still applies up to the wage base. Check with payroll — some employers allow a one-time 401(k) deferral percentage just for bonuses.
How can I reduce taxes on my bonus?+
Strategies: (1) Maximize 401(k) deferral on the bonus check — most employers allow a separate bonus deferral election; (2) Contribute to an HSA if you have an HSA-qualified HDHP and haven't maxed it ($4,400 self / $8,750 family in 2026); (3) Time large bonuses for low-income years if you have control (e.g., negotiate to defer a bonus into a sabbatical year); (4) Bunch charitable contributions in bonus years using a Donor-Advised Fund to itemize at higher levels than the standard deduction; (5) Harvest capital losses in the same year to offset bonus-driven income tax exposure to the 3.8% NIIT.
What is the supplemental wage tax rate?+
The IRS supplemental wage withholding rate is 22% federal on bonuses, commissions, severance, and other supplemental wages up to $1 million per employee per year. Amounts above $1 million are withheld at 37% (the top federal rate). This is a withholding rule, not a tax rate — your actual tax owed is your marginal bracket × the income. State supplemental rates vary: California 10.23%, New York 11.7%, Massachusetts 5%, etc. Some states have no separate supplemental rate and just apply normal withholding tables to bonuses, which can produce very different cash-flow outcomes depending on your employer's payroll software.
