If you're eligible for an annual bonus, you know it usually comes in the first few months of the following year. So, your 2025 tax return will likely reflect the bonus you were given for the work you did in 2024.
Bonuses are taxed as additional wages, but the amount that's withheld depends on how your employer distributed the extra funds — as a standalone lump sum or added to your regular paycheck.
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What's considered a bonus?
Bonuses are supplemental wages given for services rendered, beyond your regular salary. While cash is the most frequent form of compensation, the IRS considers gift cards, trips, expensive meals, vehicles and other perks taxable bonuses.
Payment types that count as bonuses include:
- Signing bonuses
- Retention bonuses
- Performance bonuses
- Holiday bonuses
- Spot bonuses
- Back pay
- Commission payments
- Severance
What's not considered a bonus by the IRS?
Items given to you to perform your job — like a night out to entertain a client — are not considered bonuses.
Small gifts from your employer are considered "de minimis fringe benefits," too small to count as taxable income. That includes $25 Starbucks cards, movie tickets, dinner while you're working late — even a bottle of wine or Christmas ham.
The IRS looks at frequency and value, though, so third row seats at a Taylor Swift concert or free dinners every week may be taxable.
How are bonuses taxed?
Bonuses are considered additional wages and are taxed at the federal and (if applicable) state level. Federal taxes can be withheld in several ways:
The percentage method: If you receive a standalone bonus check of up to $1 million, it's taxed at a flat 22%. Any amount over $1 million is taxed at 37%.
The aggregate method: if your bonus is combined with your regular paycheck, it will increase the withholdings your employer sets aside on that check. However, you should receive the difference as a refund.
Typically, you also have to pay payroll taxes, including the 1.45% Medicare tax and the 6.2% Social Security tax.. (in 2026, Social Security tax is limited to the first $184,500 of wages.)
With the percentage method, if you received a standalone $5,000 bonus check, it would be taxed at 22%, and you'd owe $1,100 on it. That leaves you with a net bonus of $3,900.
The aggregate method makes things more complicated: If you're an individual filer who gets paid biweekly and had a gross income of $80,000 in 2025, you'd normally qualify for the standard deduction of $15,750.
That would give you a taxable income of $65,000 and an effective tax rate of 11.5%.
But if your company tacks on a $5,000 bonus to a regular paycheck, the IRS requires it to calculate withholding as if the entire paycheck were regular wages. That can make the withholding rate much higher than your normal paycheck, often around 22–24%.
That means $1,300 to $1,500 of that $5,000 is withheld up front. It's only temporary, however: when you file your return, the excess withholding will likely come back as part of your refund.
How to reduce the tax impact from your bonus
Nobody wants to see extra income dangled under their nose, only to see it snatched away by Uncle Sam. Or worse, have it bump them into a higher tax bracket. Fortunately, there are several ways to minimize how your bonus will affect your tax liability
Adjust your withholdings
If your employer uses the aggregate method (combining your bonus with your regular pay), you can adjust the withholdings on your W-4 so less will be taken from your bonus. Some employers let you specify withholding on a bonus on a separate W-4.
Use deductions to lower your taxable income
If you're concerned your bonus is going to raise you into a higher tax bracket, see what you can do to lower your income. Do you qualify for the Child Tax Credit or Earned Income Tax Credit? Have you incurred enough medical costs, mortgage interest and other eligible expenses that it makes sense to itemize? Are you old enough to claim the extra standard deduction for seniors?
Contribute to a tax-advantaged retirement account
Money put toward a 401(k), traditional IRA or HSA is pretax, so any contributions from your bonus will lower your taxable income for the year. Most workers have to set their contribution percentages before the bonus is paid, but check with your company's HR department
Defer your bonus
If you're worried that your bonus will push you into a higher bracket, you can ask your employer if they'd put it off until the following year. There's no guarantee they'll say yes, and you'll still have to pay those taxes eventually, but it gives you more time. It's an especially savvy strategy if you expect to make less money next year.
Smart ways to use your bonus
Although your bonus will be taxed, it's still a cash windfall. Here are some options for using your bonus to significantly improve your financial life.
1. Pay down debt
If you've got high-interest debt, any additional income should go toward paying it down. If your bonus isn't enough to wipe the slate clean, you can still apply the avalanche or snowball method to make a real dent.
If you're seriously in the hole and don't see a way out, consider using the money to fund a debt settlement plan. You'll need to have at least $7,500 in unsecured debt and can expect to pay up to 25% of your enrolled balance for the service, plus additional fees.
2. Boost your emergency fund
If you're not in the red, see if you have enough money set aside to deal with unexpected expenses, like car repairs or a sudden job loss. Because it combines an elevated return, security and relative liquidity, a high-yield savings account is a great place to set up your emergency fund.
Lending Club's HYSA offers one of the highest returns on the market. There's no monthly maintenance fee, minimum balance requirement or cap on the higher yield. You do need an initial $100 deposit and a $250 monthly deposit, however.
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3. Max out your retirement accounts
Once you've got the basics covered, it's time to think of your future. Because your bonus is considered income, it can be funneled toward your 401(k) or IRA. In fact, contributing to a traditional 401(k) will lower your taxable income.
The money you contribute counts toward your overall contribution limits, so you may not be able to contribute it all. In addition,
You'll likely need to set the deduction percentage before the bonus is paid. If you miss that window, you could increase your regular contributions slightly to compensate.
3. Invest it in an index fund
If you've already hit the caps on your 401(k) and IRA, you can put the money in a taxable investment account. Because it's linked to an index like the S&P 500, an index fund won't require close monitoring —and it will help diversify your portfolio.
FAQs
Are bonuses taxed differently than regular pay?
Bonuses are considered supplemental wages by the IRS and added to your annual income. The amount that's withheld up-front depends on whether your employer gives you a standalone check (percentage method) or adds the bonus to your regular paycheck (aggregate method).
Are signing bonuses taxed?
Signing bonuses are treated as taxable income that is subject to federal and state taxes. A flat 22% federal withholding rate is usually applied to bonuses under $1 million.
Do I have to pay state taxes on my bonus?
Most states that have income tax treat bonuses as regular wages and tax accordingly. Some have flat supplemental wage rates, while others follow the usual state tax rate.
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