How Bonuses Are Taxed: Free Bonus Tax Calculator + Guide

If you received a bonus, you’re likely curious about taxes. You might be asking, “How are taxes withheld from your bonuses when you receive them?”

While the prospect of a holiday bonus or some extra cash can be uplifting, understanding how your bonus is taxed can help you determine how much money you’ll receive after taxes. The IRS views any bonus you receive as wages. This means that almost all bonuses are taxed.

That said, some bonuses and gifts aren’t taxable, like certain fringe benefits. Additionally, with recent tax reform via the One Big, Beautiful Bill, qualified overtime of up to $12,500 can be deducted for tax years 2025 through 2028.

In this guide, we’ll discuss tips for receiving bonuses and explain how you can use our bonus tax calculator to determine the amount of taxes to be withheld when you receive it.

Key takeaways

• Most bonuses are treated as taxable income, but there are some exceptions, like cash equivalents, vacation, and fringe benefits.
• If your bonus is issued with your paycheck, your bonus will be taxed at the same rate as the rest of your pay.
• If your bonus is issued separately from your paycheck, your bonus will be taxed at the 22% federal tax rate for bonuses under $1 million.
• For bonuses over $1 million, a 37% tax rate applies to the amount that exceeds the first million.

Are taxes withheld when you receive a bonus?

At the time of receipt of your bonus, federal taxes are typically withheld by your employer, which can be at a higher tax rate than your actual tax rate used when you file your taxes.

But don’t worry, since your actual tax rate based on your total taxable income for the year could be lower, you may get back some of what was withheld from your bonus as part of your federal tax refund.

How are bonus taxes calculated?

Employers typically use either of two methods for calculating federal tax withholding on your bonus:

1. The aggregate method 
2. The percentage method

Check out our bonus calculator. This tool answers one of our most frequently asked questions. You’ll get an estimate of how much federal taxes you can expect to be withheld from your bonuses when you receive them.

Aggregate method 

If you receive your bonus along with your paycheck, your employer will use the aggregate method to calculate your withholding.

With the aggregate method, your employer or payroll provider will withhold federal taxes at the same percentage that’s normally withheld from your paycheck.

If 35% is withheld when you are paid, then your employer will withhold 35% from your bonus as well.

Percentage method

When your employer issues your bonus separate from your paycheck, your employer or payroll provider will withhold taxes using the percentage method.

The percentage method is the simplest way to withhold bonus taxes since your employer or payroll provider will withhold federal taxes at a flat 22% rate and not at your normal tax rate when you are paid. If you get an especially large bonus that’s over $1 million, the additional amount will be withheld at 37%.

Generally, most employers and payroll providers choose to use the percentage method. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%, down from the federal income tax rate of 25%.

What are the pros of each bonus tax method?

The pros of each method depend on what your regular tax rate is.  If you are in a lower tax bracket with a lower tax rate, then being taxed at your regular lower tax rate in the aggregate method, as opposed to the percentage method at 22%, is probably more beneficial to you.

If you are in a higher income bracket and your tax rate is over 22% then having taxes withheld using the percentage method will give you more of your bonus but you may end up owing taxes if not enough is withheld on your bonus income.

What are the cons of each bonus tax method?

There are downsides to both the aggregate and percentage methods.

The aggregate method can add unnecessary confusion to your bonus taxes because your income tax rate comes into play, which involves your W-4 form. In some cases, it can lead to paying a larger percentage of your bonus in taxes, which also means you have access to a smaller portion of your bonus.

If your regular tax rate is higher than the flat 22% rate used in the percentage method, then the percentage method provides you with more of your bonus than the aggregate method. However, this could result in a smaller tax refund or possible taxes owed.

At the end of the day, the method used by your employer or payroll provider depends on if you receive your bonus together with your paycheck or separately. For a contractor bonus,  taxes are not withheld since you are considered self-employed, so it’s best to use tax-saving tips for contractors included here.

Are there any bonuses that might not be taxable?

Bonuses you receive from your employer are considered supplemental income. This means they’re taxable by the IRS. However, certain fringe benefits may not be considered taxable bonuses. This includes benefits like occasional event tickets and gift baskets.

New tax reform for overtime pay

While it’s not a traditional bonus, overtime pay adds to your paycheck at various intervals throughout the year. Fortunately, you now get to keep more of this money in your pocket.

As of July 4, 2025, the One Big, Beautiful Bill has established a new tax provision for overtime. For tax years 2025 through 2028, you may be able to deduct qualified overtime income of up to $12,500 ($25,000 if married filing jointly).

How does this deduction work? First, it’s important to note that this credit phases out for income over $150,000 ($300,000 for joint filers). When calculating this deduction, your tax savings will depend on your applicable tax rate. For example, if your tax rate is 24% and you’re filing as a single taxpayer, your maximum tax savings would be $3,000. 

This deduction is especially beneficial to taxpayers who work in roles such as police officers, nurses, and others who are likely to work a significant amount of overtime.

Are bonuses taxed federally and by the state?

Bonuses are always federally taxed, and some states may have additional taxes for bonuses. Bonus tax rates vary from state to state, so you can check your state tax regulations to determine your tax rate.

Are there ways to minimize bonus taxes?

There are several ways you can minimize the amount of bonus taxes you owe, but it’s important to abide by federal and state tax laws. A tip for minimizing bonus taxes: Ask your employer to defer your bonus until next year.

What happens if too many taxes are withheld from your bonus?

If an excessive amount of taxes are withheld from your bonus, you may get some of what was withheld back in the form of a tax refund when you file your taxes.

Lower the bonus taxes you owe and maximize your refund

Tax season can bring about new tax implications, especially if you recently received your first bonus. Our bonus tax calculator makes it easy to estimate how much taxes will be withheld from your bonus when you receive it. That way, you can get an estimation of how much of your bonus you will keep and figure out what moves you can make to help your finances and tax outcome.

Try our bonus calculator for an estimate of your bonus tax withholding. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.