How Are Bonuses Taxed in 2025?

Bonuses paid by employers get special tax treatment and could have a significant impact on an employee’s tax situation. In the United States, bonuses are typically considered supplemental wages, which means they are subject to different withholding rules than regular income. There are two ways bonuses can be taxed: the percentage method or the aggregate method. The percentage method applies if a bonus is paid separately, while the aggregate method is used if a bonus is included in a regular paycheck.

A financial advisor can help you understand how bonus income will affect your overall tax liability and recommend strategies to manage it effectively.

What Qualifies as a Bonus?

Employee bonuses are additional financial rewards given to employees on top of their regular salary. These bonuses can serve as incentives to boost productivity, reward exceptional performance, celebrate company milestones and generally keep employees motivated and aligned with the company’s goals.

Companies may offer several types of bonuses, including:

• Performance bonuses are awarded based on an employee’s achievements or the company’s overall success.
• Signing bonuses are often used to attract top talent in competitive industries.
• Retention bonuses may be offered to encourage employees to stay with a company during critical periods.
• Holiday bonuses are sometimes given as a gesture of goodwill during the festive season.

No matter what the purpose or type of the bonus, when it is paid out, the recipient will face tax consequences. Taxes due can include federal and state income tax as well as unemployment tax and FICA withholding for Social Security and Medicare.

Ways a Bonus Might Be Taxed

Any taxes due on a bonus will typically be withheld by the employer, reducing the take-home dollar value of the bonus. Bonuses are typically considered supplemental income by the IRS, which means they are subject to different withholding rules than regular wages. The method used to calculate the withholding can significantly impact the amount of withholding.

There are two primary methods for taxing bonuses: the percentage method and the aggregate method. Each has its own implications, and knowing the difference can help you anticipate your net bonus amount.

The percentage method is used when a bonus is paid separately from the regular paycheck. It can lead to a higher initial tax withholding rate (22% up to $1 million, then 37%), which may be more than your usual income tax rate. However, the actual tax you owe on your bonus will depend on your total income for the year and your tax bracket.

The aggregate method involves including your bonus to your most recent regular paycheck and calculating the withholding based on the total amount. This method can also result in a higher withholding rate, especially if your bonus pushes your total earnings into a higher tax bracket temporarily.

Employers might use the aggregate method if they issue bonuses alongside regular paychecks. For employees, this could mean a larger chunk of your bonus is withheld, potentially leading to a smaller immediate payout. However, any excess withholding could be refunded when you file your tax return.

Exemptions From the Bonus Tax

One of the most common ways to avoid the bonus tax involves employer-sponsored retirement plans. Contributions to plans like a 401(k) can often be made with pre-tax dollars, effectively reducing the taxable portion of your bonus. This not only lowers your immediate tax liability but also helps you save for the future. So, if your employer offers a retirement plan, consider whether directing a portion of your bonus to it can help you to take advantage of this exemption.

Another way to reduce the tax burden on your bonus is through contributions to a health savings account (HSA). If you are enrolled in a high-deductible health plan, you can contribute a portion of your bonus to an HSA, which offers tax-free growth and withdrawals for qualified medical expenses. This can be a strategic way to manage healthcare costs while minimizing your tax liability.

You should note, however, that both 401(k) and HSA contributions are subject to annual limits. For 2025, you can contribute up to $23,500 to a 401(k) plan. If you’re age 50 or older, you may add another $7,500 as a catch-up contribution. Additionally, individuals between ages 60 and 63 may qualify for a special catch-up contribution of $11,250. And, if you contribute to an HSA, the limit is $4,300 for individuals ($8,550 for families).

Making charitable contributions is a third way to reduce the taxable amount of your bonus. Donations to qualified charitable organizations may be deducted from your taxable income if you itemize deductions, thereby lowering your overall tax bill. This can benefit you financially while supporting causes that you care about.

Tips for Reducing the Tax Impact of Your Bonus

If you’re looking ways to lower taxes on your bonus, here are three general tips that could help:

• Adjust the timing: If your employer is flexible, consider requesting your bonus in a year when your income may be lower. This could help you stay in a lower tax bracket and reduce the overall tax rate applied to the bonus.
• Update your withholding: You can manage the tax impact by temporarily increasing the withholding on your regular paycheck. By increasing your withholding on your regular paycheck, you can offset the additional tax liability from your bonus, helping to prevent a large tax bill at the end of the year.
• Use tax planning strategies: As we noted earlier, consider using your bonus to make contributions to retirement accounts, such as a 401(k) or IRA, which can lower your taxable income. A financial advisor can also help you identify other investment strategies like tax-loss harvesting to further reduce your tax burden.

Bottom Line

In 2025, most bonuses are treated as supplemental income and taxed by the IRS at a flat 22% rate. The final tax you owe may be higher or lower depending on your total income and tax bracket. Bonuses are also subject to Social Security and Medicare taxes, which reduce the amount you take home. Because tax rules can change, you should keep up with current laws to better manage your finances.

Tax Planning Tips

• A financial advisor can help manage your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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