How to Avoid Paying Taxes on a Bonus Check

The satisfaction of receiving a year-end bonus may soon be tempered by the realization that income taxes will have to be paid on the extra money. Bonuses are treated as income and thus subject to taxation, but there are ways to manage and reduce the amount of taxes that will be owed. As is the case with other income from an employer, the employer is required to withhold taxes from a bonus, reducing your take-home pay from the windfall.

A financial advisor can potentially help you optimize your tax strategy for a bonus.

How Are Bonuses Taxed?

Bonuses are considered supplemental wages, which means their taxes are withheld differently than your regular paycheck. Employers typically use one of two IRS-approved methods to withhold taxes: the percentage method or the aggregate method. Under the percentage method, your bonus is subject to a flat federal withholding rate of 22% for most bonuses, which can make the tax bite feel larger upfront, even if your overall tax liability ends up lower when you file your return.

With the aggregate method, your employer adds your bonus to your most recent paycheck and withholds taxes based on your normal income tax bracket. This approach can push the combined amount into a higher bracket for that pay period, resulting in higher withholding on that specific paycheck.

Either way, it’s important to remember that withholding is not the same as the actual tax you owe. The amount withheld is an estimate, and your final tax bill is determined when you file your return. Depending on your deductions, credits and total income for the year, you may receive a refund or owe additional tax.

You can get an idea of how a bonus may affect your tax liability by using our income tax calculator:

Bonus Tax Strategies

Strategies to manage the taxes you’ll have to pay on a bonus fall into two camps. First, you can reduce your gross income. Second, you can increase the deductions that apply to your income.

1. Make a Retirement Contribution

One of the most effective ways to reduce taxes on a bonus is to reduce your gross income with a contribution to a tax-deferred retirement account. This could be either a 401(k) or an individual retirement account (IRA). The amount you contribute to the retirement account, subject to limitations, reduces your taxable income so you’ll owe less.

The limitations are different for various types of retirement accounts. They also change from year to year. Note that you also can’t get a deduction for contributions to a Roth IRA.

For 2025, the limits are:

• 401(k)s, 403(b)s and most 457s: $23,500 ($31,000 for taxpayers age 50 or older)
• IRAs: $7,000 ($8,000 for taxpayers age 50 or older)

For 2026, the limits are:

• 401(k)s, 403(b)s and most 457s: $24,500 ($32,500 for taxpayers age 50 or older)
• IRAs: $7,500 ($8,500 for taxpayers age 50 or older)

2. Contribute to a Health Savings Account (HSA)

If you’re covered by a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA). These contributions reduce your gross income by the contributed amount. You can also withdraw from an HSA to pay qualified medical expenses without incurring taxes, which makes this one of the most attractive tax-management strategies.

There are limits on how much you can contribute to your HSA. For 2026, the limit is $4,400 for an individual and $8,750 for a family. In 2025, those limits were $4,300 for individuals and $8,550 for families.

3. Defer Compensation

You may be able to save on taxes by asking your employer to delay paying the bonus until January. If the bonus would push your income into a higher tax bracket this year and you expect less income next year, this strategy makes considerable sense. Even if you will still be in the same tax bracket, you benefit by delaying the day you have to pay the taxes by the year.

4. Donate to Charity

If you itemize your deductions rather than taking the standard deduction, you can contribute to a charity to reduce your taxable income. You may want to consider bunching donations by making two years’ worth of planned donations this year. You can donate up to 50% of your adjusted gross income to a qualifying charity, including nonprofits promoting literacy, education and amateur athletics as well as religious charities.

5. Pay Medical Expenses

If you itemize deductions and have medical or dental bills that weren’t reimbursed by insurance, you can reduce your taxable income by using the bonus to pay for them. You can only deduct unreimbursed medical and dental expenses in excess of 7.5% of adjusted gross income.

6. Request a Non-Financial Bonus

You may be able to reduce taxes on your bonus to zero by asking your employer to make it a non-financial bonus. Examples of non-financial bonuses could include the ability to work from home or work flexible hours. Not all non-financial bonuses are tax-free, however. If you get extra paid vacation time instead of a check, for instance, it can be taxed as a financial bonus.

7. Supplemental Pay vs. Regular Pay

If your employer delivers the bonus to you as part of your regular paycheck, regular income tax withholding will apply. If it’s delivered with a separate check, it’s considered supplemental income. The difference is that supplemental income withholding is  a flat 22% while ordinary income is withheld at your regular rate.

It might result in more or less withholding to have the bonus delivered as supplemental income rather than as an amount added to your regular check. However, which approach will result in lower withholding depends on your situation.

Bottom Line

Year-end bonuses are subject to taxation like any income received from an employer. Some strategies can help manage or reduce the taxes owed on a year-end bonus, however. Some of these require donating to charity or making a contribution to a retirement or health savings account. Others, such as deferring compensation, will call for some coordination with your employer.

Tax Planning Tips

• If you anticipate a bonus, you may want to talk over your options for reducing taxes with a financial advisor. 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.
• Be sure you are paying what you owe in federal taxes on your income – and no more. Using SmartAsset’s income tax calculator can help you know for certain that you are paying the correct amount.

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