How Bonuses Are Taxed — and Why Your Bonus Feels Smaller Than Expected

Bonuses are just income — eventually

The myth is that bonuses are taxed at a higher rate. In reality, a bonus is ordinary income: by year-end it's taxed exactly like salary. What trips people up is withholding — the amount taken out at the moment you're paid, which often differs from your true final rate.

In the US, employers commonly withhold bonuses at a flat supplemental rate (22% federally for most amounts), which can be higher or lower than your actual bracket. Any over-withholding comes back as a refund; under-withholding means a bill. The bonus itself isn't penalised.

Why it still feels smaller

A lump sum can also briefly push your withholding as if you earned that much every period, inflating the tax taken at source. Add Social Security, Medicare or National Insurance and the cash that lands can be noticeably less than the headline number — even though your annual tax is unchanged.

Some countries treat one-off payments specially. Germany applies a 'one-fifth' method that can soften the tax on certain lump sums; the UK simply runs it through PAYE. The key point: judge a bonus by its after-tax annual effect, not the payday deduction.

Make the most of it

If your country allows it, diverting part of a bonus into a pension or retirement account can shelter it from tax entirely while boosting long-term savings — often the single best use of a windfall for higher-rate taxpayers. Our bonus calculator shows the after-tax value of a lump sum so you can plan before it arrives.