Bonus tax rate 2024: How bonuses are taxed in 2025

Key Takeaways

• Bonuses are extra compensation that your employer gives you beyond your regular pay, often for special occasions or performance milestones.
• Employers can calculate tax withholdings on bonuses using either the percentage or aggregate method, each with different approaches.
• The percentage method is simpler but might withhold too much, particularly for high earners, leading to a tax bill later.
• The aggregate method combines your bonus and regular pay, withholding taxes based on your W-4, often leading to more accurate withholdings but smaller paychecks upfront.
• In 2024, federal tax on bonuses is 22% for up to $1 million in bonuses, with any amount above that taxed at 37%.
• Bonuses are reported as income on your tax return, either through Form W-2 or 1099-NEC, depending on your employment status.
• Gifts are typically not taxable, but gifts over $18,000 may require the giver to file a gift tax return.
• You can lower your tax on bonuses by contributing to retirement accounts, deferring the bonus, or funding an HSA to reduce taxable income.
• Itemizing deductions, such as paying for medical expenses or making charitable donations, can help reduce the tax burden on your bonus.

What is a bonus? 

A bonus is compensation given to you by your employer in addition to your typical compensation, like your salary, according to the IRS. And while bonuses are subject to income tax, the IRS doesn't consider them regular wages and doesn’t tax them the same way. 

Broadly speaking, employers give out bonuses on special occasions, like holidays, or build them into certain compensation plans, like making certain sales goals. Other types may include annual, merit-based, referral, relocation, sign-on, and retention bonuses. 

The IRS counts your bonus as supplemental wages, and they can be subject to different federal withholding rules than your regular salary. 

How are bonuses taxed?  

The IRS gives employers two ways to calculate tax withholdings on supplemental wages, like bonuses. The first is the percentage method (also called flat-rate method) and the second is the aggregate method. However, regardless of the method you use, supplemental wages are still subject to Social Security, Medicare, and other taxes. 

The percentage method  

The percentage method is also called the “flat-rate method.” It’s the more popular of the two with employers, since it’s much easier to figure out. 

Put simply, with the percentage method, your supplemental wages are run as a separate payroll with a separate check or deposit issued. For many companies, there is an added expense to running an extra payroll, but employers tend to prefer this simpler method, despite the extra cost. 

This is also why so many organizations limit how often they pay out bonuses, commissions, and other supplemental wages. 

Keep in mind that states tax supplemental wages at different rates, so be sure to ask a local Jackson Hewitt Tax Pro about your state and local rules and regulations. 

The major drawback to the percentage method applies most often to high-earning employees. Their tax may be greater than their withholdings, which could lead to a surprise bill during tax season. Read more about that below. 

The aggregate method  

The other method for calculating tax withholding on supplemental wages is called the aggregate method. 

With this one, your employer combines your regular and supplemental wages into your gross pay for a pay period, and withholds taxes based on your W-4. The employer only has to run one payroll, but it can be much more complicated for employers to calculate. 

The aggregate method tends to be more accurate than the percentage method, but it can still lead to an employer withholding too much. So, a tax refund would be more likely than a tax bill, but this would mean a smaller paycheck for the employee up front. 

Bonus tax rates in 2024  

In 2024, the federal withholding rate for supplemental wages is 22% for up to $1 million in bonuses. It’s important to note that the $1 million limit does not include a regular salary income. 

If you receive a very large bonus—over $1 million—you'll have 22% in federal tax withheld on the first million, then 37% on bonus funds above the first million. 

How to report bonuses on tax returns  

Your bonus will be added to your total income for the year. When you file your annual tax return, your total income, including your bonus, gets taxed according to your effective tax rate. Employers withhold taxes on your paycheck throughout the year to prepay that tax on your behalf. If you've had enough withheld, you won't owe anything. If you’ve had too much or too little withheld, that might mean a tax refund or bill, respectively. 

The total amount you received in bonuses for the year as an employee will be combined with your other earned income and listed in Box 1 of your Form W-2. 

If you’re an independent contractor or self-employed and earn an award with a bonus payment that was $600 or more during the year, you should receive a Form 1099-NEC, Nonemployee Compensation. 

• You'll report Box 1 income such as incentive payments on Schedule C, which you'll file with Form 1040. 

• Entering the total on Schedule C combines this income with other income on Form 1040. 

Are gifts taxable?  

In most cases, if you receive a gift, you don’t have to worry about being taxed on it. However, if the value of a gift you received exceeds the annual gift tax exclusion amount, which is $18,000 for 2024, the person who gave you the gift may have to file a gift tax return. 

Tips on lowering tax on bonus  

The first way to lower your tax on bonuses (and overall) is to reduce your taxable income. You may do this in any number of ways, such as: 

• Use your bonus to invest in your IRA or 401(k) to get a tax break. 

• If you think you’ll be taking a major pay cut in the next year—for example, if you're ready to retire or go part-time—ask your employer to defer your bonus until the following tax year to lower your overall tax liability. 

• Put part of the bonus toward a health savings account (HSA) to reduce your gross income. 

The other way to lower your tax is to itemize your deductions. You may choose to: 

• Use your bonus to pay for out-of-pocket medical expenses that aren’t reimbursable. It’s important to note that for this to be applicable, your expenses would have to be over 7.5% of your adjusted gross income (AGI) and you would need to itemize your expenses when filing your taxes. 

• Make qualified donations to a charity. 

While you’ll always pay tax on your bonuses, you can find ways to lower your tax burden by investing in a tax -deferred retirement plan, deferring the bonus, or generating deductions from your taxable income. 

Work with a Jackson Hewitt Tax Pro to learn about how a bonus may affect you during tax time and throughout the year, and the best ways to handle this supplemental income. Find a Jackson Hewitt office near you. 

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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