How are bonuses taxed? My employer withheld taxes but I still owe $1,300 - confused about tax brackets

Bonuses are considered "supplemental wages" by the IRS, which means they can be withheld at a different rate than your regular paychecks. Most employers use the flat rate withholding method of 22% for bonuses, regardless of your tax bracket. If your actual tax rate on that income is higher than 22%, you'll end up owing more when you file. It sounds like you've moved into a higher tax bracket with your combined regular income plus bonus. Remember that our tax system is progressive - only the income above each threshold gets taxed at the higher rate, not all your income. However, if your bonus pushed you into a bracket higher than 22% (which starts at $44,726 for single filers in 2025), then the 22% withholding wouldn't have been enough. Also, bonuses can impact other parts of your tax return - they might reduce certain credits or deductions that phase out at higher income levels, which could further explain why you owe this year.

I ran into the exact same problem last year when I got a performance bonus. Found this website https://taxr.ai that literally saved me hours of frustration. I uploaded my W-2s and bonus statements and it showed me exactly why I owed extra taxes (turned out my employer only withheld at 22% but I was actually in the 32% bracket). The site broke down how much was withheld vs. how much should have been for my actual tax bracket. Even showed me what deductions I was missing. Way clearer explanation than what H&R Block gave me.

Ok so I tried that taxr.ai site after posting my skeptical comment, and I'm actually really impressed. Uploaded my W-2 and bonus statement and it immediately showed me that my employer only withheld 22% on my bonus, but my actual tax rate on that income was 28% because of my tax bracket. That's exactly why I owed extra! It also showed me that my bonus pushed my income over a threshold that reduced my student loan interest deduction, which cost me another $500. Literally nobody at H&R Block explained this to me when I was there. Definitely saving me from making the same mistake next year.

If you're still struggling with tax questions about your bonus, I'd recommend trying to call the IRS directly. BUT (big but), I spent 3 hours on hold last week and never got through. Then I found this service called Claimyr https://claimyr.com that got me talking to an actual IRS agent in under 15 minutes. You can see it in action here: https://youtu.be/_kiP6q8DX5c They have this system that navigates the IRS phone tree and holds your place in line, then calls you when an agent is about to pick up. The agent explained exactly how bonus withholding works and confirmed what others here are saying - the standard withholding rate is often lower than what you actually owe if it pushes you into a higher bracket.

I need to eat some crow here. After posting my skeptical comment, I decided to try Claimyr out of desperation because I've been trying to reach the IRS about my audit for weeks. It actually worked exactly as advertised. Got connected to an IRS agent in about 12 minutes. The agent confirmed what others have said about bonus withholding and explained how my company was following standard procedure. She even walked me through how to adjust my withholding for next year to account for expected bonuses. Turns out I could have avoided my whole audit situation if I'd understood this bonus withholding issue sooner.

Just wanted to add that bonuses can affect more than just your federal income tax bracket. In my case, a large bonus also: 1) Pushed me over the IRMAA threshold for Medicare premiums (doesn't apply if you're younger) 2) Reduced my child tax credit eligibility 3) Made part of my Social Security benefits taxable If your bonus is large enough, consider talking to a tax professional BEFORE you receive it about tax planning strategies. Sometimes taking the bonus in a different tax year or splitting it can help.

The specific issue might be that your employer used the "percentage method" of withholding (flat 22%) rather than the "aggregate method" where they combine it with your regular paycheck and withhold based on the combined amount. The aggregate method typically results in higher withholding that better matches what you'll actually owe. The aggregate method is more accurate but more work for payroll, so many companies just use the flat 22% to make their lives easier. It's perfectly legal but can lead to exactly your situation.

If your bonus pushed you from the 22% to the 24% bracket, for example, remember that our tax system is progressive. Only the dollars that fall into that higher bracket get taxed at the higher rate. The rest of your income is still taxed at the lower rates of the brackets below it. But a large bonus can definitely cause underwithholding if your employer only withheld at the standard 22% supplemental wage rate. For 2025, single filers hit the 24% bracket at $95,376, the 32% bracket at $182,101, and the 35% bracket at $231,251. Married filing jointly has different thresholds.

I went through this exact same situation last year! Got a large bonus that was about 30% of my salary and ended up owing $2,100 even though my employer withheld taxes. What helped me understand it was realizing that the 22% flat withholding rate on bonuses is often not enough when you factor in state taxes, FICA taxes on the bonus amount, and how it affects your overall tax bracket. One thing that caught me off guard was that my bonus also pushed me over the income limit for some tax credits I'd been getting in previous years. The loss of those credits added to what I owed on top of the underwithholding issue. For this year, I updated my W-4 to have extra withholding throughout the year to cover any bonus I might receive. I'd rather get a smaller refund than owe a big chunk again. Also consider making a quarterly estimated payment if you know a bonus is coming - you can avoid underpayment penalties that way.