Updated: January 5, 2023
Rewarding your employees for a job well done is a great way to say thank you for their help boosting your bottom line. Additional time off, celebratory lunches, and free swag are wonderful, but one of the best ways you can acknowledge their efforts is by offering a cash bonus. Who doesn’t like extra money?
The IRS calls bonuses “supplemental wages” and requires you to withhold taxes on them. The withholding calculation can be done two different ways depending on how you structure the payment: aggregate and flat.
To figure withholding for aggregate bonus pay, you’ll treat the total of the regular wages and supplemental wages as a single payment for tax purposes. First, you’ll add their bonus amount to the employee's regular wages. Then, you’ll need to figure the tax on the combined pay using the IRS Publication 15-T. Next, find the tax amount for only the regular wages. Once you have this, you can subtract to determine the tax you’ll need to withhold for the bonus portion.
If you use flat withholding for bonuses, you will simply apply a tax rate of 22%, and pay the bonus by separate check. If your employee makes more than $1 million in bonuses annually, different rules do apply (like a 37% withholding on supplemental wages). You can find our flat bonus calculator here.
Regardless of the method you use to withhold income tax on supplemental wages, they’re still subject to social security, Medicare, and FUTA taxes.
Aggregate withholding for bonuses might seem complicated, but that’s what we’re here for. We’ve designed an aggregate bonus calculator to help ease this payroll burden. Simply enter your employees’ gross bonus amount along with their regular wage and W-4 information, and our bonus pay calculator will tell you how much federal and state taxes to withhold.
Calculate your employee’s bonus:
Aggregate vs. flat bonus rate examples
Your Sales Director Jack takes on a special project and does an amazing job — crushing your June sales goals. You decide to give him a $4,000 bonus in July to say thanks for his hard work. His salary is $72,000 per year or $6,000 per month. You do not separate the bonus from his regular wages, so Jack’s July gross pay is now $10,000.
Since the bonus is commingled with his regular wages, Jack’s tax bracket probably bumps up, so you will need to calculate and withhold taxes based on a one-time paycheck of $10,000 instead of the usual $6,000.
For flat method withholding, Jack will get two checks. One for $4,000 for his bonus taxed at a flat 22% federal income level and one for his regular paycheck for $6,000 wages minus the usual tax withholdings.
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. If you have questions about how flat bonus withholding works, please click here.