The Best Way to Calculate Bonus Pay (2025)

You’re probably spending too many late nights with a calculator trying to figure out how to calculate bonus pay. But there’s a better way. The basic math is straightforward: pick your bonus amount (percentage of salary or flat rate), withhold the right taxes (22% federal plus state), and get that money to your team. But somewhere between "thanks for crushing Q4" and actually getting cash in your team's hands, things get messy.

Maybe you're worried about tax penalties. Maybe you're triple-checking your math because getting it wrong means awkward conversations and trust issues. Or maybe you're just tired of spending Sunday nights doing payroll math instead of literally anything else. We get it.

So, let's break down exactly how to calculate bonus pay without the drama. We'll also show you how modern tools make the whole thing way less painful.

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Why is bonus pay taxed so high?

"Wait, where did half my bonus go?"

Every bonus season, this question floods small business owner forums and employee break rooms. Your team member was expecting $5,000, but their paycheck only shows $3,500. Now they're upset, you're confused, and everyone's doing frantic tax math.

Here's the truth: bonuses aren't actually taxed at 40%. The federal flat rate for bonus pay is 22% for supplemental income under $1 million. Add Social Security (6.2%), Medicare (1.45%), and state taxes, and you're looking at roughly 30-35% total withholding. That’s why many people ask "are bonuses taxed at a higher rate?" The answer is complicated. They're not taxed more, but the supplemental tax rate can feel higher than your usual paycheck.

Here's the truth: bonuses aren't actually taxed at 40%. The federal flat rate for bonus pay is 22% for supplemental income under $1 million. Add Social Security (6.2%), Medicare (1.45%), and state taxes, and you're looking at roughly 30-35% total withholding.

Why does it feel like more? Because that 22% federal withholding might be higher than your employee's regular tax bracket. If they usually pay 12%, seeing 22% disappear from their bonus stings.

Real numbers to share with your team:

• $5,000 bonus = approximately $3,475 take-home
• $15,000 bonus = approximately $10,425 take-home
• $1,000 bonus = approximately $695 take-home

The IRS calls bonuses "supplemental wages." Any money outside regular paychecks. Holiday bonuses, performance bonuses, even that "thanks for covering shifts" bonus all follow the same rules. Same taxes, same confused employees wondering where their money went.

Three ways to calculate bonus pay

Not all bonuses are created equal. The way you calculate bonus pay depends on what you're rewarding, who's getting it, and how much math you're willing to do on a Tuesday night. Whether you're thanking your veteran employees with a percentage of their salary or throwing the whole team a flat holiday bonus, each approach has its place. Let's break down the three most common methods and when to use each one.

Performance-based bonuses (the most common)

Performance bonuses are the bread and butter of bonus calculations. The formula couldn't be simpler: take your employee's annual salary and multiply by your chosen percentage.

• The basic math: $50,000 salary × 10% bonus = $5,000 $35,000 salary × 5% bonus = $1,750 $65,000 salary × 15% bonus = $9,750

But here's where it gets tricky for hourly teams. Your server who picked up extra shifts all December technically has a different "annual salary" than your calculation might show. If you're basing bonuses on performance, make sure you're pulling accurate hours worked. Nothing kills morale faster than two employees with the same hourly rate getting different bonuses because you eyeballed their hours.

Flat rate bonuses (the "everyone gets $500" approach)

Sometimes simple is better. Holiday bonuses, sign-on bonuses, and "we survived the dinner rush from hell" bonuses often work best as flat amounts. Everyone gets $500. Done.

The beauty of flat-rate bonuses: no salary calculations, no percentage debates, no "why did they get more?" conversations. Perfect for seasonal thank-yous or when you want to reward the whole team equally. Just remember that $500 hits different for someone making $12/hour versus $25/hour.

Commission vs. bonus pay (why classification matters)

Here's a costly mistake: treating commissions like bonuses or vice versa. Commissions are tied directly to sales and must be included when calculating overtime rates. Bonuses are discretionary (usually) and handled differently.

• Example that'll save you from an audit: Your retail associate works 45 hours, earning 5 overtime hours. They also earned a $300 commission that week. You must recalculate their regular rate including that commission before paying overtime. Miss this step and you're looking at Department of Labor penalties.
• Nondiscretionary bonuses (like "sell 100 units, get $500") work the same way. They're promised in advance, so they count toward overtime calculations. 
• Discretionary bonuses (like "great job handling that difficult customer, here's $100") don't affect overtime.

2025 bonus pay tax rates

Time for the numbers that make everyone's eyes glaze over but could save you from serious tax trouble. Bonus tax rates vary wildly depending on where your business operates, and getting them wrong means penalties, interest, and very unhappy employees come April.

Federal rates (the same everywhere)

The federal government keeps it simple:

• Under $1 million in supplemental wages: 22% flat rate
• Over $1 million: 37% on the amount above $1 million
• Plus: 6.2% Social Security (on wages up to $168,600 in 2025)
• Plus: 1.45% Medicare (no limit)

That's your baseline. Now let's add state taxes to see why your employees' take-home looks so different from the bonus you promised.

State rates (where it gets messy)

The high-tax states:

• California: 10.23% flat rate on bonuses (13.3% over $1 million)
• New York: 4% to 10.9% based on income, plus up to 3.876% for NYC residents
• Oregon: 9.9% on amounts over $125,000
• Minnesota: 5.35% to 9.85% based on income

The medium-tax states:

• Illinois: 4.95% flat rate
• Colorado: 4.4% flat rate
• Georgia: 1% to 5.75% based on income
• North Carolina: 4.5% flat rate

The no-tax paradise:

• Texas, Florida, Tennessee, Nevada, Washington: 0% state tax
• Alaska, New Hampshire, South Dakota, Wyoming: 0% state tax

Multi-state headaches

Got remote employees or multiple locations? You withhold based on where the employee works, not where your business is headquartered. That means tracking different rates, different filing requirements, and different deadlines for each state. Miss registering in a state where you have employees, and you're looking at penalties plus interest on all those missed withholdings.

Pro tip: If this section made your head hurt, that's your sign to use payroll software that handles multi-state compliance automatically. Your Sunday nights will thank you.

Common bonus pay mistakes that'll cost you

Every bonus season, small business owners make the same expensive mistakes. Not because they're careless, but because nobody teaches you this stuff when you're trying to run a restaurant, manage a retail store, or keep your team happy. Here are the mistakes that hurt the most, and how to dodge them.

Forgetting overtime recalculation

This one's a lawsuit waiting to happen. When you pay nondiscretionary bonuses (anything promised in advance), you have to recalculate overtime rates for the period covered by the bonus.

Example that'll save your bacon: Your assistant manager worked 45 hours last week at $20/hour. You promised a $200 weekly bonus for hitting sales targets. That bonus changes their regular rate from $20 to $24.44/hour. You owe an extra $2.22 per overtime hour. Miss this and the Department of Labor will find you.

Wrong tax withholding equals penalties

"We'll just true it up at year-end" sounds reasonable until you're hit with underwithholding penalties. The IRS expects you to get it right the first time. Withhold too little and you'll pay penalties plus interest. Withhold too much and your employees lose trust.

The fix: Use the correct supplemental withholding rate (22% federal) and double-check state rates. Don't guess. Don't use regular payroll rates for bonuses. And definitely don't forget to withhold taxes entirely because "it's just a small bonus."

Not tracking hours accurately

Your lunch cook picked up extra shifts all month. Your cashier stayed late to help with inventory. But if you're calculating percentage-based bonuses on estimated hours, you're asking for trouble. Two employees with the same role and bonus percentage shouldn't get different amounts just because you guessed wrong on their hours.

Manual timesheets and memory aren't good enough when money's involved. You need actual hours worked, not "I think they usually work 35 hours." One disgruntled employee comparing paychecks is all it takes to tank morale.

Missing state tax registration

Here's a fun surprise: hiring one remote employee in another state means you need to register for payroll taxes there. Forget to register before paying that bonus? You're on the hook for penalties, interest, and all the taxes you should have withheld.

The worst part: States can go back years to collect. That one remote employee in Pennsylvania could trigger an audit that uncovers three years of missed payments. Plus penalties. Plus interest. Plus the headache of fixing it all.

How to make bonus season less painful

You've made it this far without throwing your calculator across the room. Good. Now let's talk about turning bonus season from a stress fest into something that actually works for you and your team.

Track hours automatically (before you need them)

Nothing ruins bonus calculations faster than realizing you don't actually know how many hours your team worked. Digging through paper timesheets, trying to remember who covered which shifts, texting employees to verify hours. That's a recipe for mistakes and resentment.

Modern time tracking means you get accurate hours ready when bonus time rolls around. No guesswork, no favoritism accusations, no "I definitely worked more hours than that" arguments. Just pull the report and calculate. When your time tracking feeds directly into payroll, those percentage-based bonuses practically calculate themselves.

Use payroll software (seriously, just do it)

Still running payroll with spreadsheets? Payroll software handles the math, knows the current tax rates, and keeps you compliant across states. It's the difference between spending Sunday night double-checking calculations and spending it literally anywhere else.

Good payroll software automatically classifies bonuses as supplemental wages, applies the right withholding rates, and generates the reports you need for taxes. One click for separate bonus payroll, automatic tax calculations and clear pay stubs so employees understand their bonus breakdown.

Create clear bonus policies

Half the drama around bonuses comes from unclear expectations. Document your bonus structure before you need it. What triggers a bonus? How is it calculated? When is it paid? Put it in writing and share it with your team.

Clear policies prevent the "I thought I was getting more" conversations and the "why did they get a bonus but I didn't?" resentment. When everyone knows the rules upfront, bonuses become motivating instead of mysterious.

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The real cost of bonus mistakes

These aren't just theoretical problems. That overtime recalculation error could mean owing thousands in back wages plus penalties. Wrong tax withholding might trigger an audit. Poor hour tracking destroys team trust overnight. And that missed state registration? Some states charge $100 per employee per month in penalties.

The good news is that calculating bonuses doesn't have to mean late nights with a calculator and worried texts from employees about their paychecks. When your time tracking automatically feeds into payroll, percentage-based bonuses calculate themselves, and with automatic tax calculations for every state plus one-click bonus payroll runs, you've turned bonus season from a stress fest into just another quick task. Built specifically for small businesses with hourly teams, Homebase handles the math so you can focus on what actually matters: rewarding your team for crushing their goals. Try Homebase for free.

How to calculate bonus pay FAQs

Can I pay bonuses without taxes?

Short answer: no. Long answer: still no, but people keep trying. Every bonus is taxable income, period. The IRS considers bonuses supplemental wages, which means taxes are mandatory.

What you can do: time bonuses strategically (like January instead of December if someone expects a lower income year), maximize pre-tax deductions, or offer non-cash perks that aren't taxable. But that cash bonus? Uncle Sam wants his cut.

Are bonuses taxed at a higher rate?

Not really, but it feels that way. Bonuses get hit with a flat 22% federal withholding, which might be higher than your employee's regular tax bracket. Come tax time, they'll get a refund if they overpaid. But try explaining that to someone staring at their smaller-than-expected bonus check.

The confusion comes from seeing more taxes taken out upfront, not from bonuses being in some special high-tax category. They're taxed as regular income on the final tax return.

What's the bonus tax rate for 2024/2025?

Federal: 22% flat rate (for supplemental income under $1 million) Social Security: 6.2% (on wages up to $168,600) Medicare: 1.45% (no limit) State: Varies from 0% (Texas, Florida) to 13.3% (California on high earners)

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