taxes

Supplemental wages: why your bonus, RSU, and commission look heavily taxed

11 min read · published 2026-05-05 · updated 2026-05-05

A bonus check often loses 30-45% to withholding before it hits your account, even if your effective annual tax rate is much lower. This is the supplemental wage rule at work. Here is the IRS framework, the two methods employers use, and how the difference is reconciled at filing.

Educational only — not advice. PayslipIQ USA provides educational guidance only. It is not legal, tax, accounting, payroll, employment, credit, financial, or consumer reporting advice. Results are estimates based on the information you enter or upload and may be incomplete, outdated, or inaccurate. PayslipIQ USA does not verify income, certify payroll accuracy, determine legal violations, or confirm that money is owed. PayslipIQ is independent and not affiliated with the IRS, SSA, U.S. Department of Labor, any state tax agency, employer, or payroll provider. Always confirm with your employer, payroll department, the IRS, your state labor or revenue agency, a CPA, attorney, or another qualified professional before acting.Figures reflect tax year 2025. Last verified 2025-04-01. Rules and limits may change.

What counts as supplemental wages

Bonuses (annual, sign-on, retention, spot)
Commissions
Severance pay
Retroactive pay raises and back pay
Awards and prizes
Taxable fringe benefits
Reported tips paid through payroll
Restricted Stock Unit (RSU) vesting
Non-qualified stock option exercises
Discretionary performance pay

The flat method (IRS Pub. 15)

When supplemental wages are paid separately from regular wages, the employer can withhold federal income tax at a flat 22%. If cumulative supplemental wages cross $1,000,000 in a calendar year, the portion above $1M is withheld at 37%. FICA (6.2% Social Security up to the wage base + 1.45% Medicare) applies as normal. State and local supplemental rules vary by state.

The aggregate method

Alternatively, the employer adds the supplemental amount to your most recent regular paycheck and withholds using the normal W-4 tables on the combined amount. This method often produces higher temporary withholding because the lump sum looks like an annualized salary much higher than your actual annual income.

Why your $10,000 bonus produced ~$5,500 in cash

A typical breakdown: $2,200 federal flat 22%, $620 Social Security 6.2% (assuming you have not crossed the wage base), $145 Medicare 1.45%, $500-$900 state tax, plus any local tax, plus retirement contribution if your bonus participates in your 401(k) deferral percentage. Net: roughly 55-65% of gross.

What comes back at filing

The 22% flat rate is a withholding rate, not your final tax rate. When you file your return, your bonus is added to your regular wages and taxed at your true marginal rate. If your effective rate is below 22%, the difference comes back as a refund (or reduces what you owe). The 37% over-$1M tier rarely refunds because most $1M+ earners are in the 37% bracket already.

RSU vesting is the same rule, but bigger

Vested RSUs are taxed at the fair market value on the vest date as supplemental wages. Many companies do "sell-to-cover" — automatically selling enough shares to satisfy the 22% supplemental withholding. If your marginal rate is 32% or 35%, sell-to-cover under-withholds and you may owe a large balance plus an underpayment penalty.

Avoiding the underpayment penalty

The IRS safe harbor is generally satisfied if you pay (a) 90% of the current year tax, or (b) 100% of the prior year tax (110% if prior-year AGI was over $150,000). For RSU-heavy years, many people use Form W-4 Step 4(c) extra withholding or quarterly estimated payments to top up. Always confirm with a CPA.

How PayslipIQ models bonuses

Our Bonus Calculator applies the flat 22%/37% federal rate, FICA, and an estimated state withholding. It surfaces the effective withholding rate and reminds you that this is not the final tax rate. Use it as a forecast, not a tax-return substitute.