Bonus Taxation Explained
Bonuses are considered supplemental income and are typically withheld at a flat 22% federal rate (or your marginal rate if over $1 million). Combined with FICA (7.65%) and state taxes, you'll take home roughly 65-70% of your bonus. A $10,000 bonus yields about $6,500-7,000 take-home depending on your state.
The flat 22% withholding is not your final tax rate - it's just what's withheld from your paycheck. When filing taxes, your bonus is added to total annual income and taxed at your actual marginal rate. If your marginal rate is 24%, you'll owe more at tax time. If it's 12%, you'll get a refund. Adjust W-4 or make estimated payments if bonuses push you into higher brackets.
Strategically timing bonuses can reduce taxes. If you'll be in a lower bracket next year (sabbatical, retirement, job loss), consider deferring the bonus. If you're in a high bracket this year but expect lower income next year, acceleration doesn't help. Also, use bonuses for wealth building - consider putting 25-50% toward retirement accounts, emergency fund, or debt payoff before lifestyle spending.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
It's withheld at 22% federal (plus FICA and state), which can total 35-40%. This is withholding, not your final tax rate. When you file taxes, bonuses are taxed as regular income based on your total annual income.
Contribute to pre-tax 401(k) or traditional IRA to reduce taxable income. You can make additional 401(k) contributions up to annual limits ($23,000 in 2024). Some employers allow deferring bonuses to future years for tax planning.
Possibly, but only the income above the bracket threshold is taxed higher - not all your income. US tax brackets are marginal. Even if bonus pushes you from 22% to 24% bracket, only dollars above the threshold are taxed at 24%.
If you haven't maxed contributions, yes - great idea. Reduces taxable income, and your bonus effectively costs you only ~60% since you save ~40% in taxes. Balance this with other financial needs like emergency fund or high-interest debt.
Yes, when you file taxes. If 22% withholding exceeds your actual marginal rate, you'll get a refund. If 22% is less than your actual rate (you're in 24%+ bracket), you may owe additional tax.