Bonuses are taxed as supplemental wages and are subject to federal and state income tax withholding, as well as payroll taxes like Social Security and Medicare.

Federal Taxation of Bonuses

• The IRS treats bonuses as supplemental wages, which are usually taxed differently from regular wages at the time of withholding.
• Employers typically withhold federal income tax on bonuses using one of two methods:
  • Percentage method (flat rate): A flat 22% federal withholding rate applies to bonuses up to $1 million in a calendar year.
  • Aggregate method: The bonus is added to regular wages, and tax is withheld based on the total amount using the employee’s usual tax rate.
• For bonuses exceeding $1 million, the amount above $1 million is withheld at a higher rate of 37%.
• Payroll taxes also apply, including 6.2% Social Security tax (up to the wage base limit, which is $176,100 for 2025) and 1.45% Medicare tax, with an additional 0.9% Medicare tax potentially applying to high earners

State Taxation of Bonuses

• State income tax applies to bonuses as well and varies by state.
• For example, in California, bonuses are subject to a flat state withholding rate of about 10.23%, which is separate from regular state income tax brackets

Summary

• Federal withholding on bonuses is generally 22% up to $1 million, then 37% above that.
• State tax rates vary; California uses a flat 10.23% rate on bonuses.
• Social Security and Medicare taxes also apply.
• The actual tax owed on bonuses is determined when you file your tax return, where bonuses are combined with your other income and taxed at your ordinary income tax rates.

This means your bonus withholding might feel high initially, but your final tax bill depends on your total income and tax situation for the year.