Why Bonuses Feel Like They Are Taxed at 40%
Receiving an annual performance bonus or sales commission is a major career milestone, but many workers are shocked when they open their bonus check to find that nearly 35% to 45% of the award vanished to payroll withholdings.
The reason lies in how the Internal Revenue Service categorizes earnings. Regular salary is withheld based on standard annual payroll formulas. Bonuses, commissions, severance, and accumulated PTO payouts are classified as Supplemental Wages under IRS Publication 15-T.
The Mandatory 22% Flat Withholding Rule
For supplemental wage payments up to $1,000,000 during the calendar year, the IRS requires employers to withhold a flat 22% for federal income taxes. If your total supplemental wages exceed $1,000,000, any amount above that threshold is withheld at the highest top marginal rate of 37%.
When You Get a Tax Refund
It is vital to understand that withholding is not the same as your final tax liability. If your total taxable income for the year places you in the 12% marginal tax bracket, but 22% was withheld from your bonus check upfront, you overpaid the IRS by 10%. You will receive every cent of that overpayment back as part of your tax refund when you file Form 1040.