Bonus Tax 2026: Why Your Bonus Check Is Smaller Than Expected

You were promised a $10,000 bonus. The check shows up and it’s $7,035. Where did the other $2,965 go? Not into a higher tax bracket — into mandatory IRS withholding rules that have nothing to do with your real tax liability. Bonuses get a flat 22% federal hit before the money ever leaves payroll, and most people never realize they’re probably owed a refund on it.

The Short Answer

Per IRS Publication 15 (Circular E), Section 7, bonuses are classified as “supplemental wages” and must be withheld at a flat 22% federal rate, separate from your normal paycheck withholding. FICA still applies. State tax may also apply at its own supplemental rate. Your bonus isn’t taxed more — it’s just withheld more, and you reconcile the difference at tax time.

The Two Methods Employers Can Use

Percentage method (most common). The bonus is identified separately on your paystub and withheld at exactly 22% federal. Clean, simple, and what almost every Fortune 500 payroll system uses. Treas. Reg. § 31.3402(g)-1(a)(7) authorizes this method when the bonus is “separately identifiable.”

Aggregate method. The bonus is added to your most recent regular paycheck and the combined amount is run through the regular wage-bracket withholding tables. Whatever extra was withheld vs. your normal paycheck is the “bonus withholding.” This method usually pulls a higher percentage than 22% because the imputed annualized salary briefly looks much larger. If your employer chooses aggregate (often smaller employers using off-the-shelf software), you may see 28-35% withheld on a single bonus.

The $1 million rule. Once your cumulative supplemental wages from a single employer cross $1 million in a calendar year, the excess MUST be withheld at 37% — the top federal marginal rate. This is mandatory and the employer cannot opt out.

Worked Example 1: $5,000 Bonus, No State Tax

You live in Texas. Your employer uses percentage method. You’re under the Social Security wage base ($184,500 for 2026 per the SSA contribution and benefit base) and not yet over $200K YTD.

• Gross bonus: $5,000
• Federal withholding (22%): −$1,100
• Social Security (6.2%): −$310
• Medicare (1.45%): −$72.50
• State income tax: $0 (Texas)
• Net bonus: $3,517.50

Effective withholding rate: 29.65%.

Worked Example 2: $10,000 Bonus, California

You live in California. Same assumptions as above plus California’s flat 10.23% supplemental withholding (per California EDD 2026 rates; 15.99% applies to stock options and non-qualified deferred comp).

• Gross bonus: $10,000
• Federal withholding (22%): −$2,200
• Social Security (6.2%): −$620
• Medicare (1.45%): −$145
• California supplemental (10.23%): −$1,023
• California SDI (1.1%, uncapped per SB 951): −$110
• Net bonus: $5,902

Effective withholding rate: 40.98%. Run the exact numbers for your state in the bonus tax calculator.

Worked Example 3: $25,000 Bonus, New York

New York supplemental rate is 11.7% (NY Department of Taxation and Finance Pub NYS-50). NYC residents add 4.25% city supplemental.

The NYC resident loses an additional $1,062.50 to city supplemental withholding alone.

Why You Probably Get Some of It Back

The 22% federal withholding is just an estimate. Your actual federal tax is computed on your full annual income at your real marginal bracket per IRS Revenue Procedure 2025-11. If your marginal rate is below 22%, you’re owed a refund on the bonus withholding.

For most middle-class W-2 employees in the 12% or 22% bracket, the 22% bonus withholding is roughly accurate or slightly over. If you’re a high earner, you’ll need to make sure your regular withholding (or estimated tax payments) covers the gap, or use Form W-4 Step 4(c) to add extra withholding throughout the year. See our guide on updating your W-4.

How to Reduce Bonus Withholding (Legally)

1. Direct it into your 401(k)

Many employer 401(k) plans let you set a separate deferral percentage on bonuses — up to 100% in some plans. Defer the entire $10K bonus into your traditional 401(k) (within the 2026 limit of $23,500) and you avoid all federal AND state income tax on it — though FICA (7.65%) still applies. Net cost: ~$765 in payroll tax for $10K parked tax-deferred.

2. Run HSA contributions through payroll

A Section 125 cafeteria-plan HSA contribution dodges federal income tax, state income tax, AND FICA. The 2026 HSA limit is $4,400 self-only / $8,750 family. If your bonus comes when you have HSA room, redirect what you can.

3. Time large bonuses across years

For executives or sales staff with multi-six-figure bonuses, splitting payment across two calendar years keeps you below the $1M supplemental threshold (37% mandatory withholding) and may keep you in a lower marginal bracket each year.

Common Misconceptions

“My bonus pushed me into a new bracket and ruined my year.” No. Brackets are marginal. Only the dollars above the threshold are taxed at the higher rate. A bonus never makes a raise a net loss.

“If I take the bonus as a check instead of through payroll, I avoid the 22%.” No. Any bonus paid by your employer is W-2 wages and triggers Pub 15 supplemental withholding regardless of payment method.

“Stock vests are taxed differently than cash bonuses.” Mostly the same. RSU vests are also supplemental wages at 22% federal flat (37% above $1M). The difference is California specifically uses 15.99% for stock-based supplemental wages vs. 10.23% for cash bonuses.

Sources

Federal supplemental withholding rules: IRS Publication 15 (Circular E), Section 7 “Supplemental Wages” and Treas. Reg. § 31.3402(g)-1. 2026 federal brackets and standard deduction: IRS Revenue Procedure 2025-11. 2026 Social Security wage base: SSA Contribution and Benefit Base. California supplemental rate: California EDD 2026 withholding tables. New York supplemental rate: NY Pub NYS-50.

Educational, not tax advice. Consult a CPA for your specific situation. Last verified April 28, 2026.