Bonuses are a pretty awesome way to thank and acknowledge outstanding employees for all of their hard work. Just like regular wages though, taxes have to be taken out of a bonus check. And the way you calculate withholding taxes on bonus payments varies depending on how you pay them out to your employees.
In IRS lingo, any bonuses are called “supplemental wages.” And when it comes to make sure you’re getting taxes on bonuses right, there are two ways you can withhold income taxes: flat bonus calculations and aggregate.
If you award bonuses to your employees as a separate payment and do not commingle them with regular wages, you can use the simpler flat bonus method to determine federal withholding taxes. For 2020, the flat withholding rate for bonuses is 22% — except when those bonuses are above $1 million. If your employee’s bonus exceeds $1 million, congratulations to both of you on your success! These large bonuses are taxed at a flat rate of 37%.
Still need help? Our flat bonus calculator can help you find the correct amount of federal and state taxes to withhold. Simply enter your employees’ gross bonus amount below and we’ll do the work.
If you choose to pay a bonus as part of a normal paycheck, you’ll treat the total of the regular wages and supplemental wages as a single payment for tax purposes. In this “aggregate tax” approach, the employee’s normal tax rate will apply. The IRS Publication 15-T can help you determine how to do this in detail, or click here for our aggregate bonus calculator.
Jill is new to the team, but she has had an outstanding year. Jill has increased productivity and cut costs in her department by 10% this year, and you want to say thank you for her hard work. So, you decide to award Jill a $5,000 bonus, separate from her regular wages. Her salary is $72,000 per year or $6,000 per month.
Since the bonus is being paid separately, you simply withhold a flat 22% for Jill’s federal taxes. For this very simple example, we are assuming Jill does not pay state or other income taxes. In this case, Jill’s net bonus pay would be 78% of $5,000, or $3,900.
Now say Jill has had a really good year. No — really, really good. And you decide to pay her a $1,500,000 bonus. The first million will be subject to that same 22% tax making the withholding $220,000 taking it to $780,000 after taxes. The next half million will get hit with a 37% tax shrinking it to $405,000. That means her bonus check will need to be written for $1,185,000. Still a pretty nice payout.
Regardless of the bonus tax withholding method you use on supplemental wages, please note that they are still subject to social security, Medicare, and FUTA taxes. Both methods require a little extra math, so we recommend using a payroll bonus calculator to make sure you’ve got your withholdings correctly calculated.