How Is Bonus Income Taxed in 2026?
The IRS treats bonuses as supplemental wages — compensation that is not regular salary, including commissions, overtime pay, severance, awards, and back pay. Because bonuses are paid irregularly and often in large lump sums, the IRS applies special withholding rules that frequently shock recipients who expect their usual tax rate.
For 2026, the federal supplemental wage withholding rate is 22% for bonuses under $1 million paid to a single employee in a calendar year. If total supplemental wages exceed $1 million in one calendar year, the excess is withheld at 37% — the highest marginal rate. This is not your final tax liability; it is simply the amount your employer must withhold. Your actual tax rate depends on your total annual income, deductions, and credits when you file your return.
Employers can choose between two withholding methods. The percentage method applies a flat 22% (or 37% for amounts over $1M) to the bonus amount. The aggregate method adds the bonus to your most recent regular paycheck, calculates withholding on the combined amount, then subtracts what was already withheld from your regular pay — often resulting in higher withholding. Most employers use the percentage method because it is simpler and more predictable.
What Is Bonus Depreciation for Businesses?
Bonus depreciation (also called additional first-year depreciation) is a tax incentive that allows businesses to deduct a large percentage of the cost of qualifying property in the year it is placed in service, rather than spreading the deduction over the asset's useful life. Created under Section 168(k) of the Internal Revenue Code, bonus depreciation applies to tangible personal property, certain improvements to nonresidential real property, and specified plants.
Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation was 100% for assets placed in service between September 27, 2017 and December 31, 2022. It then phases down by 20 percentage points each year: 80% (2023), 60% (2024), 40% (2025), 20% (2026), and 0% beginning in 2027. For 2026, a business purchasing $500,000 in qualifying equipment can immediately deduct $100,000 (20%) and depreciate the remaining $400,000 under regular MACRS.
Bonus depreciation differs from Section 179 expensing in two critical ways. First, Section 179 is elective and subject to annual dollar limits and business income limits, while bonus depreciation is automatic and not limited by business income. Second, Section 179 cannot create or increase a business loss, while bonus depreciation can. Many businesses use both provisions together: Section 179 first (up to the limit), then bonus depreciation on the remainder.
2026 Bonus Tax Rates: Employee vs. Business
Employee Bonus Withholding
| Federal supplemental rate | 22% |
| Over $1M supplemental | 37% |
| Social Security | 6.2% |
| Medicare | 1.45% |
| Add. Medicare ($200k+) | 0.9% |
Source: IRS Publication 15 (2026)
Business Bonus Depreciation
| 2023 placed in service | 80% |
| 2024 placed in service | 60% |
| 2025 placed in service | 40% |
| 2026 placed in service | 20% |
| 2027+ placed in service | 0% |
Source: IRC Section 168(k)
Percentage Method vs. Aggregate Method: Which Costs You More?
The IRS allows employers two methods for withholding federal income tax on bonuses. The method your employer chooses directly impacts how much cash you receive in your bonus check.
Percentage Method (Flat 22%)
Your employer withholds a flat 22% for federal income tax on the bonus amount. If the bonus exceeds $1 million in total supplemental wages for the year, the excess is withheld at 37%.
Example: $10,000 bonus → $2,200 federal withholding. Simple, predictable, and usually results in less upfront withholding than the aggregate method.
Aggregate Method (Potentially Higher)
Your employer adds the bonus to your most recent regular paycheck, calculates withholding on the combined total using your W-4, then subtracts what was already withheld from your regular pay.
Example: You earn $4,000 biweekly and receive a $10,000 bonus. Combined = $14,000. Withholding on $14,000 minus withholding on $4,000 = $2,713 — $513 more than the percentage method. This method often pushes you into a higher marginal bracket temporarily.
If your marginal tax rate is 12%, the 22% flat withholding is too high — you will get a refund when you file. If your marginal rate is 24% or higher, the 22% flat withholding is too low — you may owe additional tax. The aggregate method is more "accurate" to your actual tax situation but creates cash flow problems by withholding too much upfront.
FICA Taxes on Bonuses: The Hidden 7.65%
Unlike federal income tax withholding, FICA taxes on bonuses are non-negotiable. Every dollar of bonus is subject to Social Security and Medicare taxes, regardless of which withholding method your employer uses.
Social Security
6.2%
Up to $184,500 wages
Medicare
1.45%
No wage cap
Total FICA
7.65%
On every bonus dollar
If you have already hit the Social Security wage base ($184,500 in 2026) through your regular salary, your bonus is only subject to Medicare (1.45%). High earners above $200,000 pay an additional 0.9% Medicare surtax on the bonus amount. This means a $50,000 bonus for someone who has already maxed out Social Security pays only 1.45%–2.35% in FICA, not the full 7.65%.
2026 Business Bonus Depreciation: 20% and Falling
For businesses, 2026 is a critical year. Bonus depreciation drops to just 20% for assets placed in service this year, down from 100% just four years ago. If you are planning capital expenditures, understanding the phase-out schedule is essential for tax planning.
| Year Placed in Service | Bonus Depreciation % | Remaining MACRS |
|---|---|---|
| 2018–2022 | 100% | 0% |
| 2023 | 80% | 20% |
| 2024 | 60% | 40% |
| 2025 | 40% | 60% |
| 2026 | 20% | 80% |
| 2027+ | 0% | 100% |
Qualifying property for bonus depreciation includes: tangible personal property with a recovery period of 20 years or less (machinery, equipment, furniture), certain improvements to nonresidential real property (qualified improvement property), and specified plants. The property must be new to the taxpayer — used property qualifies as long as it is the taxpayer's first use.
Section 179 vs. Bonus Depreciation
Section 179 allows expensing up to $1,250,000 (2026 limit) but is limited by business income — it cannot create a loss. Bonus depreciation is automatic, not limited by income, and can create or increase a net operating loss. Smart strategy: use Section 179 first up to your income limit, then apply bonus depreciation to the remainder.
Common Bonus Tax Mistakes
1. Thinking 22% Withholding Is Your Final Tax Rate
The 22% flat rate is just withholding. If you are in the 12% bracket, you will get a refund. If you are in the 32% bracket, you will owe more. Your actual tax liability depends on your total annual income, not the bonus alone.
2. Forgetting FICA on Bonuses
Many employees calculate 22% federal and stop there. FICA adds another 7.65% (or 1.45% if Social Security is maxed). On a $10,000 bonus, that is an extra $765 you did not budget for.
3. Not Adjusting W-4 for Large Bonuses
If you receive a $50,000 bonus and your regular salary is $80,000, your total income pushes you into a higher bracket. Consider increasing withholding on your W-4 or making estimated payments to avoid an underpayment penalty.
4. Missing the 2026 Bonus Depreciation Window
Businesses planning major equipment purchases in 2027 get 0% bonus depreciation. Accelerating purchases into 2026 captures the final 20% before it disappears entirely.
5. Confusing Bonus Depreciation with Section 179
Section 179 is elective and income-limited. Bonus depreciation is automatic and loss-generating. Using Section 179 when you have a loss already wastes the deduction. Use bonus depreciation instead to carry the loss forward.
How to Use the Bonus Tax Calculator
- 1
Choose Your Calculator
Select "Employee Bonus Tax" to calculate paycheck withholding, or "Business Bonus Depreciation" to calculate Section 168(k) deductions.
- 2
Enter Your Amount
For bonuses: enter gross bonus amount and select withholding method (percentage or aggregate). For depreciation: enter asset cost and placed-in-service year.
- 3
Add Deductions and Context
For paychecks: add 401(k), state tax, and YTD supplemental wages. For depreciation: select property class and recovery period.
- 4
Review and Export
See your net bonus or first-year depreciation deduction. Copy the breakdown or download the schedule for your records.
Frequently Asked Questions
Why is my bonus taxed at 22%?
Will I get a refund if my bonus was over-withheld?
What is the bonus depreciation rate for 2026?
Do I pay Social Security tax on my bonus?
Can my employer use the aggregate method without telling me?
What qualifies for bonus depreciation?
Methodology and Data Sources
The employee bonus calculator uses the official 2026 supplemental wage withholding rules from IRS Publication 15 (Circular E) and Publication 15-A. The 22% flat rate applies to supplemental wages under $1 million; 37% applies to the excess. FICA rates use the 2026 Social Security wage base of $184,500 and Medicare rates from IRS guidance. State tax is applied as a flat percentage estimate; actual state supplemental rates vary.
The business bonus depreciation calculator uses IRC Section 168(k) phase-out percentages and standard MACRS tables for the remaining basis. The 2026 rate is 20% under current law. All calculations occur client-side with no data transmitted to servers. This tool is for educational and planning purposes and does not constitute tax advice.
About the Creator
Built by
Mubarak, an independent developer. This dual-purpose tool was created after noticing that "bonus tax calculator" and "bonus depreciation calculator" are completely different tools with overlapping names — yet no single page served both audiences. All calculations use official IRS rates.References and Citations
- [70] IRS.gov. "Social Security and Medicare Withholding Rates." January 2026. https://www.irs.gov/...
- [84] CPCON Group. "MACRS Depreciation: Complete Guide to Schedules, Calculations, and Tax Strategies." March 2026. https://cpcongroup.com/...
- [91] IRS.gov. "Publication 15-A (2026), Employer's Supplemental Tax Guide." 2026. https://www.irs.gov/...
- [92] IRS.gov. "Publication 15 (2026), Circular E, Employer's Tax Guide." December 2025. https://www.irs.gov/...
- [93] IRS.gov. "Publication 15-T (2026), Federal Income Tax Withholding Methods." December 2025. https://www.irs.gov/...
- [94] PaycheckCity. "2026 Federal Bonus Tax Percent Calculator." April 2026. https://www.paycheckcity.com/...
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