Bonuses are taxed as ordinary income — but the way they are withheld often surprises employees. The IRS allows employers to use a flat 22% supplemental withholding rate on bonus payments up to $1 million (37% above that threshold). This flat rate is just withholding for the year — your actual tax liability is determined at filing based on your total income and bracket.
On top of the federal rate, your state may also withhold income tax on bonuses. This guide covers the federal rules, explains the difference between flat-rate and aggregate withholding methods, and provides a state-by-state table of bonus withholding and top income tax rates for 2026.
The IRS classifies bonuses as supplemental wages — compensation paid in addition to an employee's regular salary. The federal government allows employers to withhold tax on supplemental wages using one of two methods.
Under the flat method, employers withhold a flat 22% of federal income tax on bonus payments up to $1,000,000. For any bonus amount exceeding $1,000,000 in a single payment, the portion above $1 million is withheld at 37% — the highest marginal rate. This method is simpler and most commonly used by payroll departments for standard bonus payments.
Under the aggregate method, the employer adds the bonus to the employee's most recent regular paycheck, calculates the tax on the combined amount as if it were a regular paycheck, subtracts the tax already withheld on the regular wages, and withholds the difference from the bonus. This method can result in higher or lower withholding than the flat method depending on your income level and payroll frequency.
The 22% federal withholding is not your final tax rate on the bonus. Withholding is simply a prepayment of expected tax. At year-end, your bonus is added to all other income and taxed at your actual marginal rate based on your total taxable income. If your total income puts you in the 24% or 32% bracket, you will owe additional tax on the bonus beyond what was withheld. Conversely, if your total income is in the 12% or 22% bracket, you may receive a refund for over-withheld bonus tax. Social Security (6.2%) and Medicare (1.45%) taxes also apply to bonus income, bringing total withholding considerably higher than the 22% income tax alone.
On top of federal withholding, most states apply their own withholding rate to bonus payments. Many states treat supplemental wages the same as regular wages; some have a specific supplemental/bonus withholding rate. Where the Notes column says "top marginal rate" or "flat rate," the figure is the state income tax rate, not a confirmed bonus-specific withholding rate. The table covers selected income-tax states, not all 50.
Residents of the following states pay no state income tax on bonuses: Alaska, Florida, Nevada, New Hampshire (no tax on wages — investment income only), South Dakota, Tennessee (no tax on wages), Texas, Washington, Wyoming.
| State | Bonus Withholding Rate or Top Rate | Notes |
|---|---|---|
| California | 10.23% | Specific supplemental rate; top marginal rate 13.3% |
| New York (state) | 11.70% | Plus NYC's own 4.25% supplemental-wage withholding rate for NYC residents (a flat bonus-specific rate — not the same as NYC's graduated 3.078%-3.876% regular wage rate) |
| Oregon | 8.00% | Top supplemental withholding rate |
| Minnesota | 6.25% | Supplemental rate |
| New Jersey | 6.37% | Supplemental rate |
| Maryland | 6.50% state | Plus local tax varies; Baltimore City adds 3.2% |
| Virginia | 5.75% | Top marginal rate applied to supplemental wages |
| Georgia | 4.99% | 2026 rate |
| Massachusetts | 5.00% | Flat state rate applies to bonuses |
| Wisconsin | 3.54%-7.65% | Flat-percentage method for separately paid supplemental wages, banded by estimated annual wages (7.65% is the top band; Publication W-166, 1/26) |
| South Carolina | 5.21% | Top marginal rate |
| Maine | 5% | Flat withholding rate on supplemental wages paid separately (7.15% is the top marginal income tax rate); combined with regular pay, the regular tables apply |
| Iowa | 3.80% | Flat rate (2026 after prior reforms) |
| Montana | 5.65% | Top marginal rate |
| Idaho | 5.30% | Flat rate |
| Illinois | 4.95% | Flat state rate applies to all income including bonuses |
| Colorado | 4.40% | Flat rate |
| Utah | 4.45% | Flat rate |
| North Carolina | 3.99% | Flat rate (2026) |
| Michigan | 4.25% | Flat rate |
| Kentucky | 3.50% | Flat rate |
| Pennsylvania | 3.07% | Flat rate — one of the lowest among income-tax states |
| Indiana | 2.95% | Flat rate plus county income taxes (vary) |
| Arizona | 2.50% | Flat rate — among the lowest in income-tax states |
| Ohio | 2.75% | Flat rate (2026, per House Bill 96 — Ohio moved to a single flat rate, no longer a top marginal bracket) |
| Missouri | 4.70% | Top marginal rate |
Note: Some states conform their supplemental wage withholding to the federal flat rate (22%); others require employers to use the state's own supplemental or top marginal rate. Check with your state revenue department or payroll provider for the exact withholding method applicable in your state.
Understanding the difference between withholding and tax owed is essential for anyone receiving a bonus and concerned about their tax bill.
Federal 22% bonus withholding is the IRS's standardised estimate for the average taxpayer. If your total 2026 income puts you in the 24% bracket (taxable income $105,701–$201,775 for single filers) and you receive a $20,000 bonus, the employer withholds $4,400 (22%). But your actual federal income tax on the bonus would be $4,800 (24%). The additional $400 is reconciled when you file your tax return in April 2027. If you owe more than was withheld, you pay the balance. If less, you receive a refund.
Some employees have flexibility in requesting when they receive their bonus — for example, asking their employer to defer a December bonus to January of the next tax year. This can be advantageous if: (1) you expect to be in a lower bracket next year, (2) you had unusually high income this year, or (3) you need to manage income for other purposes (IRMAA surcharges, financial aid, ACA premium subsidies). Discuss with a tax adviser before making this request, and verify your employer's ability to accommodate it.
If your bonus results in significant under-withholding and you expect to owe more than $1,000 in federal tax beyond what is withheld, you may need to make an estimated tax payment (Form 1040-ES) for the quarter in which the bonus is received to avoid underpayment penalties.
State withholding on bonuses is similarly an estimate. Your actual state tax on the bonus depends on your total state taxable income for the year. The state reconciliation happens when you file your state income tax return, typically due the same date as the federal return (April 15, with extensions available).
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduced two notable federal income tax deductions for 2025–2028: one for qualified tip income (up to $25,000) and one for the overtime premium portion of wages. Both are capped and phase out at higher incomes, and Social Security and Medicare taxes still apply. These provisions generate frequent questions about whether they also apply to bonuses.
They do not.
The OBBBA tip deduction applies specifically to gratuities paid voluntarily by customers in traditional tip-receiving occupations in the service and hospitality industries. It does not cover employer-paid bonuses of any kind — whether performance bonuses, year-end bonuses, signing bonuses, or retention bonuses. These are employer-paid compensation, not customer gratuities, and remain fully subject to federal income tax.
The OBBBA overtime deduction covers the premium portion of overtime pay — the additional 50% above the regular hourly rate for hours worked over 40 per week under the Fair Labor Standards Act (FLSA). It is narrowly defined as the extra half-rate, not the full overtime wage. Annual performance bonuses have no connection to this overtime calculation and are not deductible under it.
Annual performance bonuses, signing bonuses, quarterly bonuses, discretionary bonuses, profit-sharing distributions, and referral bonuses are all ordinary income. They are subject to full federal income tax at your marginal rate, Social Security and Medicare taxes, and applicable state income taxes. The 22% flat withholding rate (or aggregate method) continues to apply. Plan accordingly.