Bonuses are considered supplemental wages by the IRS, which means they are taxed differently than your regular salary. Employers typically use one of two methods to calculate federal income tax withholding on bonuses: the flat rate method or the aggregate method. Understanding how your bonus will be taxed can help you plan your finances and avoid surprises come tax time.

The flat rate method applies a fixed 22% federal income tax rate to bonuses under $1 million. For bonuses exceeding $1 million, the portion over $1 million is taxed at 37%. The aggregate method combines your bonus with your regular pay and calculates withholding based on the total, which can result in higher withholding if it pushes you into a higher bracket temporarily.

• Increase 401(k) contributions to reduce taxable income
• Contribute to a Health Savings Account (HSA) if eligible
• Request your employer spread the bonus across pay periods
• Maximize deductions through charitable contributions
• Consider contributing to a traditional IRA
• Time deductible expenses to offset bonus income

Remember that while taxes are withheld at the flat 22% rate, your actual tax liability depends on your complete financial situation, state of residence, and applicable deductions. If you're in a lower tax bracket, you may get some of this withholding back as a refund when you file your taxes.