Updated: May 6, 2024
Rewarding your employees for a job well done is a great way to thank them for their help in boosting your bottom line. One of the best ways that you can acknowledge their efforts is by offering them a cash bonus. Who doesn’t like extra money? Just keep in mind that the IRS calls bonuses “supplemental wages” and requires you to withhold tax on them. The withholding calculation can be done in two different ways, depending on how you structure the payment: either aggregate or flat.
How do employers that reward top performers for a job well done handle tax withholding to ensure that Uncle Sam gets his due? Below is a free aggregate bonus calculator to calculate this tax in a few clicks. Simply enter your employee’s gross bonus amount, along with their regular wage and W-4 information. Our bonus pay calculator will tell you how much federal and state tax to withhold. Additionally, there’s information on what an aggregate bonus is, how it’s calculated, and how it differs from the flat method.
What is an aggregate bonus?
Simply put, an aggregate bonus is a payment that an individual receives in addition to their regular paycheck. When an employee receives this type of bonus, taxes are withheld based on the combined sum of the bonus pay and their wages.
How are withholdings calculated for aggregate bonus pay?
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.
How does the flat method work?
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 annually makes more than $1 million in bonuses, different rules do apply, such as 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 vs. flat bonus rate examples
Here’s an example of the aggregate approach
Your sales director Jack takes on a special project and does an amazing job, far surpassing your June sales goals. As a result, in July you decide to give him a $4,000 bonus 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. You will therefore need to calculate and withhold taxes based on a one-time paycheck of $10,000, instead of the usual $6,000.
Here’s an example of the flat withholding method
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 that you’ve got your withholdings calculated correctly. If you have questions about how flat bonus withholding works, please click here.