Why Is My Bonus Taxed So Much?

You got a $5,000 bonus and barely $3,000 landed in your account. It feels like the bonus was punished with a special, brutal tax rate. The good news: there's almost certainly no special "bonus tax", and you may get some of it back. The bad news: a bonus genuinely is taxed more heavily than you might hope — just not for the reason most people think.

Two different things are happening

The confusion comes from mixing up withholding (what's taken out of the payment now) and your actual tax (what you truly owe, settled when you file). For a bonus, these often differ a lot.

1. Withholding — why the cheque looks small

In the US, employers usually withhold federal tax on a bonus using the flat 22% supplemental rate (or 37% on amounts over $1 million), plus Social Security and Medicare (FICA), plus state tax. Stack those and a quarter to a third of the bonus can vanish before it reaches you — even if your normal salary is taxed more gently. The 22% is a withholding convention, not your final tax.

In the UK, Canada, and Australia there's no separate flat bonus rate, but a bonus is added to your pay for the period and run through PAYE/payroll, which often withholds as if you earned that much every period — pushing the withholding higher than your eventual bill.

2. Your actual tax — the marginal rate

When you file, the bonus is simply added to your income for the year and taxed at your marginal rate — the rate on your top slice of income. If your marginal rate is 24% but your employer withheld 22% federal plus FICA plus state, you may have over-withheld and get some back. If your marginal rate is 35%, the flat 22% withholding wasn't enough and you'll owe more at filing.

Why a bonus still feels heavily taxed

Even setting withholding aside, a bonus is taxed more than your "average" pay — and that part is real. Your salary benefits from the lower brackets, the personal allowance / standard deduction, and the 0% band. Those are already "used up" by your regular income. The bonus sits entirely on top, so every dollar is taxed at your highest marginal rate. That's why the proportion taken from a bonus is higher than the proportion taken from your salary as a whole — your effective rate is lower than your marginal rate, and the bonus is taxed at the marginal one.

Worked example

You earn $70,000 and get a $5,000 bonus, in a 24% marginal bracket:

• What you'll truly owe on the bonus: about 24% federal + ~7.65% FICA + state — call it roughly 33%, so you keep about $3,350.
• What was withheld: 22% federal + 7.65% FICA + state — similar, but if your state or marginal rate differs, the two won't match, and the gap is trued up when you file.

The key point: the "tiny" cheque is mostly withholding. Your real cost is your marginal rate, and any over-withholding comes back as a refund.

Can you reduce the tax on a bonus?

• Divert it pre-tax. Routing a bonus into a pre-tax retirement account (401(k)/pension/RRSP/super salary-sacrifice) can shelter it from income tax now — the single most effective lever.
• Pre-tax accounts generally. HSAs (US) and similar reduce taxable income.
• Timing. If you can influence whether a bonus lands in a high- or low-income year, the lower-income year is taxed less.
• Don't over-rely on the refund. Over-withholding just means you lent the government money interest-free; it's not a bonus on your bonus.

The takeaway

There's no punitive "bonus tax". The small cheque is aggressive withholding; your true cost is your marginal rate, applied to income stacked on top of everything else you earn. Check your marginal rate, expect the withholding to be roughly in that ballpark, and remember that over-withholding returns as a refund. To understand the marginal-vs-effective distinction at the heart of this, read marginal vs effective tax rate.