Bonus Withholding Shortfall: Why 22% Rarely Matches Your Real Tax Rate

The core issue

How bonus withholding works under IRS rules

The IRS classifies bonuses as supplemental wages — income paid in addition to regular salary. Publication 15 (Circular E) gives employers two methods for withholding federal income tax on supplemental wages: the flat-rate method and the aggregate method. The choice belongs to the employer, not the employee, and most payroll systems default to the flat-rate method because it is simpler.

Method 1: The flat-rate method (22%)

The employer withholds exactly 22 percent of the bonus for federal income tax, regardless of the employee's W-4 elections, filing status, or total income. This is the rate prescribed by IRS Publication 15 for supplemental wages paid to an employee who has also received regular wages in the same calendar year. The rate is a withholding convenience, not a separate tax rate. Your bonus is still taxed as ordinary income at your marginal bracket — the 22 percent is just what gets withheld up front.

Method 2: The aggregate method

The employer combines the bonus with your most recent regular paycheck, calculates withholding on the combined amount as though it were a single paycheck for that pay period, then subtracts the withholding already applied to the regular portion. The remainder is the withholding attributed to the bonus. This method often withholds more than 22 percent because annualizing one inflated paycheck pushes the withholding calculation into higher brackets. It can over-withhold for employees with moderate incomes and under-withhold for employees with additional income sources such as a spouse's salary or investment income.

Why the 22% flat rate creates a shortfall

The flat 22 percent withholding rate matches only the third of seven federal brackets. If your taxable income — base salary plus bonus minus deductions — places you in the 24 percent bracket or higher, the withholding on your bonus is structurally insufficient. Below is the federal-only gap at each bracket level on a $20,000 bonus.

Illustrative example assuming the entire $20,000 bonus falls within a single marginal bracket. State income tax, if applicable, adds further to the shortfall.

Worked example: $120,000 salary plus $25,000 year-end bonus

A single filer earning $120,000 in base salary receives a $25,000 year-end bonus. Here is how the shortfall develops, using 2026 federal rates and the $16,100 single standard deduction (IRS Rev. Proc. 2025-32).

At the 24 percent bracket the gap is manageable — $500. But if this employee also has a working spouse with substantial income, the household's combined marginal rate could be 32 percent, and the shortfall on the same $25,000 bonus would jump to $2,500 on the federal side alone. Use our bonus tax calculator to model your specific scenario.

The $1 million mandatory rate

When cumulative supplemental wages paid to an employee exceed $1 million during a calendar year, IRS Publication 15 requires the employer to withhold at 37 percent — the top individual rate — on the excess. Unlike the 22 percent flat rate, which is optional (the employer could choose the aggregate method instead), the 37 percent rate above $1 million is mandatory. This applies to all supplemental wages combined: bonuses, RSU vests, commissions, severance, and any other supplemental payments. If your marginal rate is 37 percent and your supplemental wages exceed $1 million, the withholding on the excess portion matches your actual tax — no shortfall on that portion.

When the aggregate method over-withholds

The aggregate method can swing the other direction and over-withhold. Because it treats the combined regular-plus-bonus paycheck as though you earn that inflated amount every pay period, it projects an artificially high annual income and withholds accordingly. This is especially common for mid-range salaries receiving a large bonus relative to their paycheck. The result is a larger refund at filing — money that was effectively an interest-free loan to the government. If your employer uses the aggregate method and over-withholds, you will get the excess back as part of your tax refund when you file.

Strategies

Four ways to handle the bonus withholding gap

1. Adjust your W-4 before bonus season

If your employer pays bonuses on a predictable schedule, file an updated W-4 requesting additional withholding on line 4(c) in the months leading up to the payout. Spread the expected shortfall across several paychecks so the extra withholding is less noticeable. Reset the W-4 after the bonus is paid to avoid over-withholding for the rest of the year. Use the W-4 extra withholding calculator to find the right amount.

2. Make a quarterly estimated payment

After receiving the bonus, calculate the shortfall and send an estimated tax payment using IRS Form 1040-ES or via IRS Direct Pay. This avoids both under-withholding and over-withholding on your regular paychecks. The payment should cover the gap between what was withheld and your actual marginal rate on the bonus amount.

3. Increase pre-tax deductions

If your employer allows it, you may be able to direct a portion of the bonus into a pre-tax 401(k) contribution, HSA, or dependent-care FSA. This reduces the taxable amount of the bonus and can bring the effective withholding closer to your actual liability. Check your plan documents — some employers cap mid-year deferral changes or exclude bonuses from elective deferral. See our bonus vs. raise calculator for a comparison of net outcomes.

4. Ask payroll about the withholding method

Ask your payroll department which method they use. If they use the flat-rate method and your bracket is above 22 percent, the shortfall is predictable. If they use the aggregate method, the withholding may be closer to your actual rate, though it could also over-withhold. Understanding which method is in effect helps you plan the right corrective step.

Bonus shortfall versus RSU shortfall

Both bonuses and RSU vests face the same 22 percent flat withholding rate as supplemental wages. The key difference is the income pattern. Cash bonuses are typically a single event — a year-end bonus, a signing bonus — while RSU vests may occur quarterly or monthly, creating recurring shortfalls throughout the year. Additionally, RSU vests involve equity mechanics like sell-to-cover that can confuse the tax picture. For the equity version of this problem, see our RSU withholding shortfall guide. For a broader overview of supplemental-wage rules, see the supplemental wages withholding guide. To understand how bonus income appears on your tax documents, see equity compensation on your W-2.