IRS Pub 15 §7 · Supplemental Wages · 22% Flat / 37% over $1M · TY 2026
Bonus Tax Withholding Guide 2026: Flat Rate, Aggregate Method, and What You Actually Owe
Why your bonus feels like it lost 40 percent, how the 22 percent flat supplemental rate interacts with FICA and state tax, and the planning moves that actually reduce what you pay. Withholding is not the same as your final tax.
Estimate your federal withholding and take-home on any bonus. Flat rate vs aggregate method side by side, with FICA and Additional Medicare.
For 2026, federal bonus withholding is a flat 22 percent on bonuses up to $1 million per employer per calendar year, and 37 percent on any excess. On top of that, Social Security (6.2 percent up to $184,500 in wages), Medicare (1.45 percent), and the Additional Medicare Tax (0.9 percent over $200K single or $250K MFJ) apply. Most state income tax states also withhold a supplemental rate. Combined federal + FICA withholding on a bonus typically totals 30 to 40 percent before state tax. This is withholding, not final tax - your actual liability is calculated on your full-year return at filing.
Key Takeaways
The federal supplemental withholding rate for 2026 is 22 percent on the first $1 million, 37 percent on any excess. OBBBA (PL 119-21) permanently extended these rates.
Employers may use either the flat method (22 percent or 37 percent) or the aggregate method (combine with regular pay and use Pub 15-T tables). Flat is the default when the bonus is identified separately from regular wages.
Social Security (6.2 percent) applies up to the 2026 wage base of $184,500. Medicare (1.45 percent) has no cap. The 0.9 percent Additional Medicare Tax applies to wages over $200K single/HOH, $250K MFJ, $125K MFS.
The $1 million threshold is per employer, not cumulative across employers. Executives receiving large bonuses from multiple employers often under-withhold relative to actual liability.
Withholding is not final tax. If your marginal bracket is below 22 percent, the excess returns at filing. If your marginal bracket is above 22 percent, you may owe more.
401(k) bonus deferral (if the plan allows) reduces federal and state income tax withholding on the deferred portion. FICA still applies to the full bonus.
Most states with an income tax also apply a supplemental rate (flat or bracket-based). 8 states plus New Hampshire (for wages) apply no state tax.
IRS Publication 15 (Circular E), section 7, defines supplemental wages as payments made to an employee that are not regular wages. The scope is broader than most taxpayers realize. Any compensation that is not a recurring periodic payment at the employee's normal rate generally falls under the supplemental wage rules for withholding purposes.
Publication 15 expressly lists the following as supplemental wages:
Overtime premium pay - the half portion of time-and-a-half required by the Fair Labor Standards Act (not regular hourly wages)
Severance pay - paid at termination, including negotiated separation agreements
Accumulated sick leave or vacation paid at termination
Retroactive pay increases - back pay for prior periods
Awards and prizes - cash awards, safety awards, length-of-service awards above de minimis
Tips - cash tips and charged tips reported by the employee (section 6)
Taxable fringe benefits - certain taxable employer-provided benefits valued as wages
Reported tips and back pay from wage claim settlements
All supplemental wages are treated the same for federal withholding: the employer may apply the flat supplemental rate (22 percent or 37 percent above $1M) or the aggregate method. The choice depends on how the supplemental wages are paid (separate check vs combined with regular wages) and the employer's payroll system.
The Flat Rate Method: 22 Percent on the First $1 Million
Under IRS Publication 15, section 7, the flat rate method is the default when the supplemental wage is identified separately from regular wages on the paycheck or paid on a separate check. Federal income tax withholding is computed by multiplying the supplemental wage by 22 percent (the "optional flat rate").
Example: A $15,000 bonus is withheld at 22 percent, producing $3,300 of federal income tax withholding. No other federal income tax rates, brackets, or Form W-4 entries affect the calculation.
The $1 Million Threshold
Once an employer has paid more than $1,000,000 in supplemental wages to a single employee during the calendar year, any additional supplemental wage is withheld at 37 percent (the highest marginal rate). This is a mandatory rule - the employer is not permitted to elect a lower rate on the excess.
Example: An executive receives a $1.3 million bonus from a single employer in a calendar year. The first $1 million is withheld at 22 percent ($220,000). The remaining $300,000 is withheld at 37 percent ($111,000). Total federal withholding: $331,000, plus FICA and state tax.
The $1 million threshold is per employer, not per employee. If the same executive received a $600,000 bonus from Employer A and a $700,000 bonus from Employer B in the same calendar year, neither employer individually crossed $1 million, and both apply 22 percent throughout. The combined $1.3 million may be under-withheld relative to the executive's actual liability.
When the Flat Method Is Available
The supplemental wage is paid on a separate check
The supplemental wage is identified as a distinct line item on a combined paystub
The employer has withheld income tax from the employee's regular wages during the year
If all three conditions are met, the employer may use either the flat rate or the aggregate method. If any condition is not met - particularly if the supplemental wage is combined with regular wages and not identified separately - the aggregate method is required.
The Aggregate Method: Treat the Bonus Like Regular Pay
Under the aggregate method, the employer combines the supplemental wage with the most recent regular wage payment, calculates federal income tax withholding on the combined amount using Form W-4 and the Publication 15-T Percentage Method tables, subtracts the withholding that would have applied to the regular wage alone, and treats the difference as withholding on the supplemental wage.
Example: An employee with a biweekly regular paycheck of $3,000 receives a $5,000 bonus in the same pay period. Under the aggregate method:
Combined paycheck = $3,000 + $5,000 = $8,000
Withholding on $8,000 (via Pub 15-T, based on W-4) = ~$1,200 (varies by filing status and W-4 entries)
Withholding on $3,000 regular alone = ~$300
Withholding attributable to the bonus = $1,200 - $300 = $900
Notice that $900 on a $5,000 bonus equals 18 percent - lower than the 22 percent flat rate. For a low-income employee, the aggregate method usually produces lower withholding. For a high-income employee whose marginal bracket exceeds 22 percent, the aggregate method produces higher withholding.
When the Aggregate Method Is Required or Preferred
The supplemental wage is not identified separately from regular wages
The employer has not withheld income tax from the employee's regular wages for the current or prior year
The employer elects the aggregate method administratively (permitted in all cases)
The aggregate method is more administratively complex because it requires running withholding on two hypothetical paychecks. Most employers default to the flat rate for separately-identified bonuses to avoid this step, unless their payroll system automates the aggregate calculation.
Social Security, Medicare, and Additional Medicare
FICA taxes apply to bonuses independently of the income tax withholding method. Three separate components apply:
Social Security Tax: 6.2 Percent to the Wage Base
For 2026, Social Security tax applies at 6.2 percent on combined wages up to $184,500. Once the employee's calendar-year wages (regular plus supplemental) reach $184,500, no further Social Security tax is withheld for the remainder of the year.
Example: An employee who has already earned $180,000 in regular wages receives a $20,000 bonus. Only $4,500 of the bonus is subject to Social Security tax ($184,500 minus $180,000). The Social Security withholding on the bonus is $4,500 × 6.2 percent = $279. The remaining $15,500 of the bonus incurs no Social Security tax.
Medicare Tax: 1.45 Percent Flat, No Cap
Medicare tax applies at 1.45 percent on the entire bonus with no wage base cap, regardless of YTD wages. A $20,000 bonus incurs $290 of Medicare tax.
Under IRC §3101(b)(2), an additional 0.9 percent Medicare tax applies to wages (and self-employment income) above the following thresholds:
Single, Head of Household: $200,000
Married Filing Jointly: $250,000
Married Filing Separately: $125,000
These thresholds are statutory and not indexed for inflation - they have not changed since the Affordable Care Act enacted the tax in 2013.
Employers are required to begin withholding the 0.9 percent Additional Medicare Tax once the employee's calendar-year wages from that employer exceed $200,000, regardless of the employee's filing status. A married employee filing jointly with a $250,000 threshold may have tax over-withheld at the $200,000 employer-level threshold; this is reconciled on Form 8959 with the employee's individual return.
FICA is a final tax, not a prepayment - it is not refundable at filing regardless of your marginal income tax bracket. That is why the 7.65 percent FICA layer on a bonus is a permanent cost rather than an over-withholding that returns.
State Supplemental Wage Rates
Every state with an individual income tax applies some form of withholding to bonuses. The method varies by state. State supplemental rates change annually and are set by each state's Department of Revenue.
No Individual Income Tax (9 States)
These states apply no state income tax withholding to bonuses. Social Security, Medicare, and federal income tax still apply.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
New Hampshire - taxed only interest and dividends through tax year 2024; wages are not taxed
Flat State Supplemental Rates (Common Examples)
Many states with flat state income tax rates apply the same flat rate to supplemental wages. The rates below are illustrative and current through tax year 2025 or 2026 depending on state legislative action. Verify the current rate with your state Department of Revenue.
Representative State Supplemental Rates (Verify with State DOR)
State
Approximate Flat Rate
Note
Illinois
4.95%
Flat state income tax applied to supplemental
Pennsylvania
3.07%
Flat state rate; local wage tax may also apply (Philadelphia 3.75% resident)
Indiana
3.00%
Flat state rate; county income tax adds separately
Colorado
4.40%
Flat state rate applied to supplemental
Massachusetts
5.00%
Flat state rate; 4% millionaires surcharge above $1M
Michigan
4.25%
Flat state rate; local city tax separate
North Carolina
~4.25%
Flat state rate; verify current year rate with DOR
Kentucky
~4.5%
Flat state rate with local occupational tax separate
Georgia
5.39% (TY2025) / 5.19% (TY2026)
Flat rate reducing under HB 111
State-Specific Supplemental Rates (Different from Regular Withholding)
Some states publish a separate supplemental withholding rate that differs from their regular withholding tables:
California: 10.23 percent on bonuses, 6.6 percent on stock options and other supplemental pay (per EDD Publication DE 44)
New York: Bracket-based, with a top supplemental rate of approximately 11.7 percent for high earners (NY DTF Publication NYS-50-T)
Vermont: 30 percent of the federal supplemental rate (approximately 6.6 percent for most bonuses)
Bracket-Method States
States without a published flat supplemental rate generally require the employer to use the regular withholding tables on the combined pay (analogous to the federal aggregate method). Examples include Virginia, Oregon, and Minnesota. In these states, the withholding on the bonus is calculated by aggregating it with the regular paycheck and applying the state's bracket tables.
Verify before acting. State supplemental rates are set by state legislation and Department of Revenue guidance and can change mid-year. Always check the current rate on your state DOR website before relying on any figure for actual withholding or tax planning.
Year-End Planning: What Actually Reduces Your Bonus Tax
The 22 percent flat federal rate and the FICA layer are not negotiable. But the total amount you ultimately keep can be materially changed by how your bonus is routed and what deferrals you elect. The window is usually narrow: most 401(k) plans require the bonus deferral election before the bonus check is cut.
1. Pre-Tax 401(k) Bonus Deferral
If your 401(k) plan permits bonus deferrals, electing to defer part of the bonus pre-tax reduces federal (and usually state) income tax withholding on the deferred amount. FICA still applies to the gross bonus regardless of 401(k) deferral - Social Security and Medicare are not reduced by 401(k) contributions.
For 2026, the IRS elective deferral limit is $23,500 (plus catch-up contributions for those age 50 and above). Your bonus deferral must fit within the annual limit across all paychecks and plans. Check whether your employer's plan treats bonus deferrals differently from regular-pay deferrals - some plans apply a separate bonus deferral rate, some apply the regular rate, and some do not allow bonus deferrals at all.
2. HSA Contribution from Bonus
If you have a qualifying high-deductible health plan and your employer's payroll system permits HSA deferrals from a bonus, an HSA contribution from the bonus reduces federal income tax, state income tax, and FICA (unique to HSA - unlike 401(k), HSA contributions are exempt from FICA when made through payroll). The 2026 HSA limit is $4,400 self-only / $8,750 family (plus $1,000 catch-up age 55+). This is a smaller ceiling than 401(k) but removes 7.65 percent of FICA on the deferred amount.
3. Fourth-Quarter Estimated Payment
If the 22 percent flat withholding is below your marginal bracket (typically 24 percent and above), you will likely owe at filing. Make a Q4 estimated tax payment through IRS Direct Pay before the fourth-quarter deadline (January 15 of the following year). This avoids the estimated tax underpayment penalty and eliminates filing-day surprise.
4. Update Form W-4 to Add Extra Withholding
If you receive regular bonuses each year and consistently under-withhold, update your Form W-4 to request additional withholding on regular paychecks under Step 4(c). This spreads the incremental tax over the remaining pay periods rather than landing as a lump-sum at filing. Our How to Fill Out W-4 guide walks through the specific line items.
5. Defer Bonus to Next Year (If the Employer Agrees)
Some executive compensation arrangements permit deferring a bonus to the following calendar year. This requires advance election under a non-qualified deferred compensation plan subject to IRC §409A rules. It is rare for rank-and-file employees but common for executives. Done correctly, deferral shifts the income into a lower-income year or into retirement; done incorrectly, §409A imposes a 20 percent additional tax plus interest.
6. Charitable Donation Matching
A cash charitable donation made the same year as the bonus increases your itemized deductions and may reduce your effective marginal rate at filing. This does not reduce withholding but does reduce your final tax. Only works if you itemize - the higher OBBBA standard deductions for 2026 ($16,100 single / $32,200 MFJ / $24,150 HoH) mean most taxpayers do not itemize.
Common Bonus Withholding Mistakes
These are the patterns we see most often at LMN Tax Inc during review-of-year planning in November and December:
Assuming 22 percent is a tax rate. It is a withholding rate. Your actual tax on the bonus could be higher (32 percent or 35 percent marginal) or lower (12 percent or 22 percent marginal). At filing, the difference flows into your refund or balance due.
Not deferring to 401(k) when eligible. For employees with a plan that allows bonus deferrals, this is often the highest-leverage single move available in the year. Must be elected before the bonus is paid.
Ignoring multiple-employer under-withholding. If you received supplemental wages from multiple employers totaling above $1 million, neither employer applied the 37 percent rate. The under-withholding surfaces at filing as a large balance due plus underpayment penalty.
Forgetting Additional Medicare. High earners near the $200K ($250K MFJ) threshold who receive a year-end bonus often do not realize the 0.9 percent extra Medicare applies. The dollar impact is small ($90 on $10,000 of bonus above threshold) but it is a recurring surprise item on Form 8959.
Confusing withholding with final tax on FICA. Federal income tax withholding is a prepayment; FICA is a final tax. The 7.65 percent FICA on your bonus does not come back at filing regardless of your refund status.
Expecting state tax to match federal. State supplemental rates are set independently and can differ significantly. California's 10.23 percent bonus rate is materially higher than most states.
Treating a signing bonus with clawback as final income. If you leave the employer before the clawback period and repay the bonus, you recover the federal income tax withheld through wage-repayment procedures, but the FICA already withheld may not be fully recoverable in all scenarios. Consult a tax professional if a clawback is active.
Federal income tax withholding (22% × $40,000)$8,800
Social Security (YTD $175K + $40K = $215K; only $9,500 below SS cap)$589
Medicare (1.45% × $40,000)$580
Additional Medicare (0.9% × $15,000 over $200K threshold)$135
Total federal + FICA withholding$10,104
Net before state tax$29,896
State tax (CA 10.23% × $40,000)$4,092
Final net take-home in CA$25,804
The employee sees $25,804 deposited (roughly 64 percent of gross) and assumes the bonus was "taxed at 36 percent." In reality:
$580 Medicare + $135 Additional Medicare = $715 is final federal tax (1.8 percent of gross).
$589 Social Security is final federal tax (1.5 percent).
$8,800 federal income tax and $4,092 California tax are advance withholding; the final liability is computed at filing. At a 32 percent federal marginal rate, the actual federal tax on the bonus is roughly $12,800. The $8,800 withheld is under by about $4,000, which will be owed at filing.
The practical move for this employee in November: a Q4 estimated payment of $4,000 to the IRS, a review of state tax to confirm California withholding matches expected liability, and a decision on whether to defer part of the bonus into a 401(k) to reduce both federal and state taxable income for the year.
LMN Tax Inc - What We See in November Planning Meetings
At LMN Tax Inc, the most common November conversation with W-2 clients is not about itemizing or charitable donations. It is about under-withholding on end-of-year bonuses. A client in the 32 percent federal bracket with a $30,000 December bonus is under-withheld by about $3,000 in federal income tax. Layer on a state that aggregates the bonus with regular wages, and the under-withholding can grow. Our standard move is a two-step fix: (1) run a Q4 projected tax calculation to size the shortfall, and (2) either make an estimated payment before January 15 or update the W-4 to add extra withholding on the final paycheck. For clients who can defer into a 401(k), the bonus deferral is usually the single most tax-efficient move available - up to the remaining annual limit, the deferred amount escapes federal and state income tax while still incurring FICA. For clients with an HSA and eligible HDHP coverage, an HSA deferral from a bonus is uniquely FICA-free and deserves separate consideration.
When Standard Bonus Withholding Rules Do Not Apply
Equity compensation (RSUs, stock options, ESPP): Cash withholding on equity vests follows supplemental wage rules but valuation timing and sell-to-cover mechanics create unique complications. For restricted stock units specifically, the FMV at vest is included as ordinary income under IRC §83(a) and the 22 percent supplemental rate applies via sell-to-cover. The under-withholding gap for senior employees is the same as the bonus side, but the share-count mechanics differ. See our RSU Tax Guide and RSU Tax Calculator for the equity-side math. Form W-2 includes the equity in Box 1 and adds FICA in Boxes 3 and 5.
Deferred compensation under IRC §409A: Non-qualified deferred compensation has its own statutory framework. Missing the §409A election window or violating the plan triggers a 20 percent additional tax plus interest. Deferred bonuses are withheld when paid, not when earned, but must be vested and subject to a substantial risk of forfeiture at the time of election.
Bonus paid in the year before it is earned: A bonus paid in December for services rendered in the following year is still taxable in the year paid (constructive receipt). This can accelerate income into a higher-marginal-rate year unexpectedly.
Clawback of a signing or retention bonus: If you leave before the clawback period and repay the bonus, the tax treatment depends on whether the repayment is in the same year (wage reduction) or a later year (wage repayment under the claim of right doctrine, potentially eligible for the IRC §1341 credit if the bonus exceeded $3,000).
Bonus paid to a resident of another state: Multi-state employees may be subject to withholding in the state where the work was performed during the bonus period, not just the state of residence. Large executive bonuses trigger state allocation questions that require prior-year work-location data.
Bonus paid to a dual-status or non-resident alien: Non-resident alien employees have different withholding thresholds and treaty-specific exemptions. The 30 percent default NRA withholding rate can apply instead of the 22 percent supplemental rate in limited circumstances.
Bonus deferred to a Roth 401(k): Roth deferrals do not reduce federal or state income tax withholding - the deferred amount is after-tax. Growth is tax-free in qualified distributions. If considering a Roth vs pre-tax bonus deferral, the answer depends on current vs expected retirement marginal rates.
Frequently Asked Questions
Is a bonus taxed at a higher rate than regular pay?
No. A bonus is withheld at a higher rate than regular pay, but it is not taxed at a higher rate. Federal supplemental withholding is a flat 22 percent on bonuses up to $1 million per employer per year, and 37 percent on any excess. Your actual federal income tax on the bonus is calculated at filing using your total annual income, deductions, and credits. If your marginal bracket is below 22 percent you recover the excess at filing. If it is above 22 percent you may owe more.
What is the supplemental wage flat rate for 2026?
The federal supplemental wage withholding rate for 2026 is 22 percent on the first $1 million of supplemental wages paid by an employer to an employee during the calendar year, and 37 percent on any portion above $1 million. The One Big Beautiful Bill Act (PL 119-21) permanently extended the individual income tax rates enacted by the Tax Cuts and Jobs Act, which is why these rates carry forward unchanged into 2026.
What counts as a supplemental wage?
Supplemental wages include bonuses, commissions, overtime premium pay (the half portion of time-and-a-half), severance pay, accumulated sick leave, retroactive pay increases, taxable non-cash fringe benefits, non-deductible moving expenses, tips, and prizes and awards. IRS Publication 15 lists the full set in sections 5, 6, and 7.
Who chooses between the flat rate and the aggregate method?
The employer chooses. Under IRS Publication 15 section 7, the flat rate method may be used whenever the supplemental wage is identified separately from regular wages. The aggregate method is required when supplemental wages are combined into a single paycheck with regular wages and not identified separately, and it may always be elected by the employer for convenience. The employee does not have a statutory right to select the method.
How can I reduce withholding on my bonus?
You cannot change the 22 percent flat rate directly because it is a statutory withholding rule. But you can reduce the net amount taken out by: (1) electing to defer all or part of the bonus into your 401(k) if the plan permits bonus deferrals (reduces federal withholding, but FICA still applies); (2) deferring into an HSA up to the annual limit if your employer's plan allows HSA contributions from bonuses (reduces both federal withholding and FICA); (3) electing additional regular-paycheck withholding to offset prior under-withholding. The headline 22 percent is not avoidable on supplemental wages that hit your paycheck.
Does my state withhold supplemental rate on a bonus?
Most states do, but the method varies. States with no individual income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming) apply no state tax. States with flat income tax rates (Illinois 4.95 percent, Pennsylvania 3.07 percent, Indiana 3.0 percent, Colorado 4.4 percent, Massachusetts 5.0 percent, Michigan 4.25 percent) generally apply the flat rate. California uses a higher bonus-specific supplemental rate of 10.23 percent. New York has bracket-based rules. Always verify the current rate on your state DOR website.
Do Social Security and Medicare apply to bonuses?
Yes. Social Security (6.2 percent) applies to bonuses up to the 2026 wage base of $184,500. Once your combined calendar-year wages exceed $184,500, no further Social Security tax applies. Medicare (1.45 percent) applies to the entire bonus with no cap. The Additional Medicare Tax of 0.9 percent applies to wages over $200K single/HOH, $250K MFJ, $125K MFS. Employers must begin withholding the Additional Medicare Tax once the employee's calendar-year wages from that employer exceed $200,000, regardless of filing status.
Can I contribute my bonus to a 401(k) to reduce taxes?
If your 401(k) plan allows bonus deferrals, yes. A pre-tax 401(k) deferral from a bonus reduces federal income tax withholding (and usually state) on the deferred amount, but does not reduce Social Security or Medicare taxes. Not every plan permits bonus deferrals, and the election usually must be made before the bonus is paid. Check with your plan administrator. The 2026 elective deferral limit applies across all plans and paychecks.
My bonus was taxed 40 percent. Do I get that back?
Partially, often yes. The headline 40 percent you see on your paystub is federal withholding (22 percent) plus FICA (7.65 percent) plus possibly state tax (5 to 10 percent). FICA (7.65 percent) is not refundable; it is a final tax. Federal withholding is an advance payment that either returns as part of your refund (over-withheld) or becomes owed (under-withheld) when you file. State withholding works the same way. So of the 40 percent, about 7.65 percent is a final cost; the rest is an advance payment.
Is the $1 million 37 percent rate cumulative across multiple employers?
No. The $1 million supplemental wage threshold is per employer per calendar year. If an executive receives $800,000 from Employer A and $400,000 from Employer B in the same calendar year, neither employer applies the 37 percent rate because neither individually paid more than $1 million. The combined $1.2 million is likely significantly under-withheld relative to actual liability, and the difference becomes owed at filing. Executives in this situation typically make a Q4 estimated tax payment to cover the shortfall.
Next Step
Use our Bonus Tax Calculator to see your federal withholding and net take-home under both the flat rate and aggregate methods. The calculator applies the 2026 Social Security wage base, Medicare, and Additional Medicare thresholds automatically.
If the 22 percent flat rate is below your marginal bracket, project your full-year under-withholding using the W-4 Withholding Calculator and either make a Q4 estimated payment or update Form W-4 with additional withholding.
If your bonus comes in the form of tip income or overtime premium, OBBBA may allow you to deduct a portion of those wages from your income tax. Use the No Tax on Tips Calculator or No Tax on Overtime Calculator for that math. The OBBBA deductions do not affect the employer's supplemental withholding.
For year-end planning covering bonuses, estimated taxes, and withholding corrections, see our How to Fill Out W-4 Guide and the OBBBA Tax Changes Guide for provisions that interact with W-2 wages.
Disclaimer: This guide is educational and does not constitute tax or legal advice. Supplemental wage withholding follows IRS Publication 15 (2026), section 7 and Publication 15-T. State rates referenced are illustrative through tax year 2025 or 2026 depending on state legislative action - always verify the current rate with your state Department of Revenue. Withholding is not the same as your final tax liability, which is determined at filing. Consult a qualified tax professional for advice on your specific situation.