Choosing a withholding method
IRS Publication 15 treats a bonus as supplemental wages and gives employers two ways to withhold federal income tax.
- The percentage method withholds a flat 22%. You can use it when the bonus is paid on its own or shown as a separate amount, and the employee had income tax withheld from regular wages this year or last. It ignores the W-4.
- The aggregate method adds the bonus to the regular wages for the period, withholds on the total using the employee's W-4, and subtracts the tax already withheld on the regular wages. It must be used when the flat-rate conditions are not met.
Once an employee's supplemental pay passes $1,000,000 for the year, everything above it is withheld at 37%, whatever method you chose. States set their own rules; the bonus tax calculator has a table of each state's bonus rate.
What a bonus costs the employer
On top of the gross bonus you pay the employer half of FICA: 6.2% Social Security and 1.45% Medicare. A $5,000 bonus costs $5,382.50 before unemployment taxes. Social Security stops at the $184,500 wage base, so a $20,000 bonus to someone already paid $180,000 this year carries only $279.00 of employer Social Security.
Federal unemployment tax (FUTA) applies to the first $7,000 of each employee's wages, and state unemployment tax has its own wage base. A bonus late in the year usually adds nothing to either.
Grossing up a bonus
To hand an employee an exact amount, gross the bonus up so the withholding comes out of the extra. In Texas with the flat rate, $5,000 net takes a $7,107.33 gross bonus. With the aggregate method and $2,500 of biweekly regular pay it takes $7,423.62, because the bonus is withheld at the employee's regular rates.
| Net to employee | Gross bonus, Texas | Employer cost, Texas | Gross bonus, California | Employer cost, California |
|---|---|---|---|---|
| $1,000 | $1,421.47 | $1,530.21 | $1,700.11 | $1,830.17 |
| $2,500 | $3,553.67 | $3,825.53 | $4,250.26 | $4,575.40 |
| $5,000 | $7,107.33 | $7,651.04 | $8,500.52 | $9,150.81 |
| $10,000 | $14,214.65 | $15,302.07 | $17,001.03 | $18,301.61 |
Grossing up other payments, such as a relocation allowance or a gift card? The gross-up calculator works the same way. Employees checking their own check can use the bonus paycheck calculator. To size bonuses from targets and ratings, or split a pool across a team, use the bonus payout calculator.