The real math
Bonus vs raise: which is actually better?
On the surface, a $5,000 bonus and a $5,000 raise look identical. In practice they are taxed differently, compound differently, and affect your benefits differently. Here is what the numbers reveal.
Tax treatment: 22% flat vs. marginal bracket
Employers withhold a flat 22% federal income tax on bonuses (the IRS supplemental wage rate). A raise, by contrast, is withheld at your marginal bracket rate through the standard payroll formula. If your marginal rate is 12%, the raise is withheld at a lower rate than the bonus. If your marginal rate is 22% or higher, withholding is roughly equal — but the bonus is still a one-time event while the raise keeps paying every period.
Both bonus and raise are subject to the same FICA taxes: 6.2% Social Security (up to the $184,500 wage base) and 1.45% Medicare. There is no FICA advantage to either option.
The compounding advantage of a raise
A raise is permanent. Year one, you earn $5,000 extra. Year two, you earn another $5,000 (plus any future percentage raise applied to the higher base). Year three, another $5,000. Over three years, a $5,000 raise adds roughly $15,000 in gross income. A $5,000 bonus adds $5,000 once.
Beyond raw income, a higher base salary increases your employer's 401(k) match (calculated as a percentage of salary), your life insurance and disability benefit (often expressed as a multiple of salary), and your future Social Security benefit if you are still below the wage base.
When a bonus might be smarter
Bonuses make sense when the employer cannot commit to a permanent cost increase, when the payment is tied to a one-time project, or when you want a lump sum for a specific goal (emergency fund, debt payoff) without locking in a recurring obligation. If your employer offers a choice, ask whether the raise option also includes compound growth in future reviews.
| Factor | Bonus | Raise |
|---|---|---|
| Duration | One time | Permanent |
| Withholding | 22% flat (supplemental) | Marginal bracket |
| FICA | Same | Same |
| 401(k) match base | Often excluded | Included |
| Future raises compound on it | No | Yes |
| 3-year cumulative value | 1x gross | 3x gross (minimum) |
Questions
Bonus vs raise FAQ
Is a bonus or a raise better financially?
A raise is almost always better over time because it compounds into every future paycheck, increases your 401(k) match base, and grows with future percentage raises. A bonus is a one-time payment. However, if you are in the 12% bracket, a bonus withheld at 22% temporarily costs more upfront (you get the difference back at filing), whereas a raise is withheld at your actual lower rate immediately.
Why are bonuses taxed at 22%?
Bonuses are classified as supplemental wages by the IRS. Employers can withhold a flat 22% for federal income tax instead of running the payment through the progressive bracket formula. This is a withholding convenience, not a separate tax rate. Your actual tax on the bonus is determined when you file your return, and any over-withholding is refunded.
Does a raise increase my 401(k) match?
Yes. If your employer matches a percentage of your salary, a higher base salary means a larger match in dollar terms. A $5,000 raise with a 50% match on 6% of salary adds roughly $150 per year in free employer contributions. Bonuses are sometimes excluded from match calculations depending on plan rules.
Are bonuses subject to FICA?
Yes. Bonuses are subject to Social Security tax (6.2% up to the $184,500 wage base in 2026) and Medicare tax (1.45%, plus 0.9% on earnings above $200,000 for single filers). These apply the same way as regular wages.
Can I put my bonus into my 401(k)?
Many employers allow you to set a separate 401(k) deferral percentage for bonus payments. Contributing your bonus pre-tax avoids the 22% withholding hit and reduces your taxable income. Check your plan rules; not all payroll systems support a separate bonus deferral rate.
Does a raise affect my tax bracket?
A raise can push some of your income into a higher marginal bracket, but only the dollars above the threshold are taxed at the higher rate. You never lose money by earning more. The calculator shows the marginal rate on the incremental amount so you can see the real after-tax value.
- Sources: IRS Publication 15 (supplemental wages, 22% flat rate) · IRS Rev. Proc. 2025-32 (2026 brackets) · SSA 2026 wage base ($184,500).
- 🔄 Last updated July 2026 · Tax year 2026
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