How Bonuses and Overtime Are Taxed

The bonus tax myth

You've probably heard "bonuses are taxed higher than regular income." That's not exactly true. Bonuses are taxed at the same rate as regular income on your tax return at year-end. But the way they're withheld from your paycheck is different — and that's where the confusion comes from.

How bonus withholding actually works

The IRS treats bonuses as "supplemental wages." Your employer has two options for withholding:

Method 1: Flat 22% rate

Most common method. Federal withholding is a flat 22% on the bonus amount, regardless of your normal tax bracket. If your bonus exceeds $1 million in a year, the rate jumps to 37% on the excess.

This is why a $5,000 bonus shows up as roughly $3,150 after federal tax (22%), then minus FICA (7.65%) = $2,767 net before state tax. Most people expect their normal "12% bracket" treatment and feel cheated.

Method 2: Aggregate method

Employer adds the bonus to your regular paycheck and withholds based on the combined total using normal withholding tables. This typically results in HIGHER withholding for one paycheck, because the IRS table thinks you suddenly earn that much every paycheck.

Less common, more complicated, but sometimes used for specific situations.

What about FICA?

FICA always applies — same 6.2% Social Security and 1.45% Medicare on bonuses, just like regular wages. No special rate. If you're already over the Social Security wage base for the year, only the 1.45% Medicare applies.

You'll get the difference back at tax time

Here's the key: if your actual federal tax bracket is 12%, but your bonus was withheld at 22%, you over-withheld by 10%. That $500 extra (on a $5,000 bonus) becomes part of your refund when you file taxes in April.

If you're in the 32% bracket and the bonus was withheld at 22%, you under-withheld by 10% and will owe additional tax at filing time.

How overtime is taxed

Overtime pay (1.5x your regular rate for hours over 40/week) is taxed exactly like regular wages — same federal tax bracket, same FICA. Nothing special.

BUT — overtime can push you into a higher tax bracket on that paycheck if it's a big amount. The IRS withholding tables assume your weekly pay represents your annualized income (multiply by 52). One unusually big paycheck can trigger withholding at higher rates than your annual situation justifies.

This evens out at year-end. You're not actually paying higher tax on overtime — just temporarily higher withholding that catches up at filing.

How to avoid bonus surprises

• Expect 22% federal withholding on bonuses, regardless of your usual bracket
• Plan for net = bonus × ~70% after federal, FICA, and state tax
• Don't spend the gross amount — your actual deposit will be much smaller
• Higher earners (32%+ bracket) should set aside extra for tax season since 22% withholding may be too low

The "make it grossed up" approach

Some employers "gross up" bonuses — meaning they pay you enough that your net (after-tax) bonus equals the amount they want to give you. A "$5,000 net bonus" grossed up at 30% effective rate would actually be paid as $7,143 gross. Common for sign-on bonuses and relocation packages, less common for performance bonuses.

How to plan for taxes on a big bonus

If you know you're getting a substantial bonus, you can adjust your W-4 in advance to avoid surprises. See our sister site W-4 Easy Guide for how to calculate the right withholding.