The Best Way to Run Bonus Payroll (2025)

Bonus payroll doesn’t have to be a paperwork nightmare. With the right tools, you can ditch the spreadsheets, dodge tax drama, and breathe easy on bonus day—paying out bonuses that make your team smile. (Isn’t that the whole idea?)

Let’s go through how to run bonus payroll in a few different ways, get into what works and what doesn’t, and see what the 2025 tax rates mean for your business. So you can reward your team with zero stress.

TL;DR: The best way to run bonus payroll (2025)

Here’s a quick breakdown of the different bonus payroll options:

• Run a separate bonus payroll (aka the “percentage method”) – Great if you want to keep things tidy and clear-cut.
• Add the bonus to your regular payroll and mark it clearly (aka the “aggregate method”) – A solid choice if you prefer to keep everything in one run.
• Lump it in without marking it as a bonus – Technically possible, but not recommended. This one’s a recipe for confusion, and possibly a tax mess later on.

What is bonus payroll?

Bonus payroll is how you handle any extra pay that you’re giving your team on top of their regular paycheck—think of it as regular payroll’s more celebratory (but still tax-heavy) cousin.

Bonus payouts might be a one-time thank-you, a reward for hitting goals, or part of a structured incentive plan. You might give payroll bonuses to your whole team at once, or just to a few standout stars. 

Bonus payroll processing can be done manually through a spreadsheet, or you can save time and avoid mistakes by running it through payroll software. (Hint: Go with the second one!)

How to run bonus payroll: Top 3 methods explained

Not sure how to run bonus payroll in a way that’s right for your business? When it comes to processing and taxing bonuses, you’ve got a few different options to consider:

• the percentage method
• the aggregate method
• the lump-in method

Run separate bonus payroll (“the percentage method”).

If you go this route, your team gets their bonus in a separate paycheck, not lumped in with their regular pay.

It's super straightforward: You withhold a flat 22% for federal income tax (that's the standard rate for any supplemental pay under $1 million in the U.S.). The bonus is also subject to the usual bonus payroll taxes like Social Security, Medicare, state taxes, FUTA, and SUTA.

Why this method works:

• It's simple and low-risk. That flat 22% is easy to calculate, especially if you're using payroll software.
• Some employees actually prefer it. If they're in a higher tax bracket, they'll owe less up front on their bonus.

What to watch out for:

• Not everyone loves it. If an employee is in a lower tax bracket, 22% might be more than they actually owe. They can claim the extra back at tax time, but let's be real—no one enjoys paperwork, and most folks would rather have that money now than months later.

The percentage method can be the easiest, cleanest, and most efficient way to handle bonus pay. It keeps things simple for you-and gets your team their well-earned reward with minimal fuss.

Include a bonus in your regular payroll run (“the aggregate method”).

With the aggregate method, you tack the bonus onto your employee’s regular paycheck—but make sure it’s clearly marked as a bonus to keep things neat and transparent for you and your team. It’s a bit more involved than the percentage method, but doable if you’ve got a good payroll provider to handle the heavy lifting.

Here’s how the tax part works:

1. Add the bonus to the regular paycheck.
2. Calculate the income tax on that total.
3. Figure out what the tax would be on just the regular wages.
4. Subtract the two, and you’ve got the tax to withhold on the bonus.

Here’s a quick example:

Say your employee earns $1,040 a month (around $12,500 a year), which puts them in the 12% tax bracket. This month, you’re giving them a $500 bonus.

Add the bonus to their regular pay: $1,040 + $500 = $1,540

• Calculate 12% of that total: $184.80
• Calculate 12% of just their regular pay: $124.80
• Subtract: $184.80 – $124.80 = $60
• So, you’d withhold $60 in taxes from their bonus payroll.

Why this method works:

• It can result in more accurate withholding based on the employee’s actual tax bracket.
• If your team is mostly in lower tax brackets, this method might mean less tax taken out of their bonus upfront compared to the flat 22%.

What to watch out for:

• It’s definitely a little more math-heavy (and time-consuming if you’re doing it manually).
• Without payroll software, or a bonus tax calculator, it can be easy to make mistakes.

Lump with regular wages.

Technically, there’s a third option—you could just increase your employees’ regular wages for the period and not label the extra pay as a bonus. This is sometimes called the gross-up method, and it treats the entire paycheck (wages plus bonus) like standard pay.

This might sound easier. But the IRS considers bonuses “supplemental wages,” which means they’re supposed to be taxed at a specific rate. If you don’t clearly report bonus pay as such, you’re likely withholding the wrong amount of bonus payroll tax.

What could go wrong?

• Incorrect tax withholding will come back to bite you with extra paperwork and stress down the road.
• Your employees might get hit with unexpected tax bills or delays in their refunds.
• If you’ve overpaid a bonus, you’ll need to notify the employee straight away and work with your payroll provider to fix it—either by asking for the overpaid amount back or by adjusting future paychecks.
• It might leave your team wondering if they can really count on you. No one wants to feel like their paycheck was handled sloppily.

The cleaner, safer bet is to go with either the percentage or aggregate method. Your books—and your team—will thank you for it.

Bonus payroll tax rates in 2025 (federal + state)

Federal taxes on bonuses are pretty straightforward to calculate. If an employee earns under $1 million in supplemental wages in 2025, the federal flat withholding rate is 22%. If an employee earns more than $1 million in supplemental wages during the year, the portion above $1 million is taxed at a flat 37% federal rate.

When it comes to state taxes, your bonus is treated just like regular pay—it’s all considered wages. But how much gets withheld depends on your state’s specific tax rules. 

Some states keep it simple with a flat rate, while others treat it just like an employee’s normal paycheck, taxing them based on their tax bracket. Here’s a quick snapshot:

• California: CA's tax on bonuses is a flat 10.23% and applies to most supplemental income, but it jumps to 13.3% for stock options or bonuses over $1 million. 
• New York: Bonus taxes in New York are considered a part of total annual income, with rates from 4% to 10.9%, depending on how much your employee earns. If they live in NYC, tack on up to 3.876% more for the city tax.
• Texas & Florida: These states don’t have any state income tax, so bonuses are only hit with federal and FICA taxes.

State differences can really affect your team’s take-home pay, so make sure to get a good understanding of how it works in your area.

4 bonus payroll best practices for small businesses

No matter where you operate or how you pay out bonuses to your team, the goal’s the same: boost morale, not confusion. Here are four best practices to help you do it right.

1. Use payroll software. 

Payroll software is your small business’s best friend for so many reasons—and bonus payroll processing is one of them. Here’s why:

• Fewer math headaches, fewer mistakes — Automated number crunching is way faster and way less error-prone than doing your bonuses by hand.
• Accurate tax withholding — Payroll tools make sure the right amount of tax is withheld from every payroll bonus, so you stay compliant and avoid tax-time surprises.
• On-time bonus payments — No delays, no awkward follow-ups. Your team gets their bonus when they expect it.
• Happier, more motivated employees — Accurate, timely bonuses show your team you value their work. That kind of trust goes a long way.

2. Be clear and upfront with your team from the start.

Above all, prioritize fairness and transparency, well before your bonus payouts happen. 

• Tie payroll bonuses to clear, measurable factors like performance, sales targets, or hours worked.
• Make sure you calculate bonuses the same way for everyone.
• Be open about how you calculate and distribute bonuses—don’t leave people guessing and speculating about your choices.

If your team has questions about how taxes on their bonus pay work, it’s a good idea to hold a quick workshop or training session. This’ll save you from answering the same bonus pay questions over and over.

3. Keep clean records for tax season. 

It’s smart to keep bonus pay separate from regular wages in your records. Why? It makes tax reporting way easier, keeps your books tidy, and helps you quickly answer the inevitable, “Hey, why was my paycheck different this month?”

Plus, when it’s time to prep W-2s, having everything clearly broken out will save you a ton of time (and stress).

4. Avoid under/over withholding headaches. 

Getting the withholding right on bonuses? It’s super important. Over-withholding leaves your employees with a smaller bonus and extra paperwork, while under-withholding means unexpected tax bills later. It (literally) pays to get it right the first time.

Run stress-free bonus payroll with Homebase.

If you’re a small business owner with an hourly team, there’s a standout all-in-one tool to keep bonus payroll simple.

Oh hey! Homebase here. We’re built for small business teams—from retail to hospitality—and we’ve helped thousands of small business owners turn “ugh, bonus payroll” into “hey, that was easy.”

"I have used many payroll systems over the years and Homebase is by far the most user-friendly. Having an app my employees can download is a huge plus." — Esther Pierce, Owner, Alphabet Kids English Academy

With Homebase, you can pay bonuses without drowning in calculations or dealing with confused employees—not to mention onboard your team, track time, and run your regular payroll. All in one place.

Bonus payroll without the brain fog? Try Homebase for free today.

Bonus payroll FAQs

How is bonus pay taxed?

Bonus pay is taxed before it hits your employee’s pocket. Just like with regular payroll, you need to deduct federal, state, and payroll taxes from the bonus amount and send that to the government on your employee’s behalf. 

The IRS considers bonus pay supplemental income. The federal flat rate for bonuses under $1 million is 22%, while amounts over $1 million are taxed at 37%. You’ll also need to account for state taxes, Social Security (6.2%), and Medicare (1.45%).

What is the tax rate on bonus payroll in my state?

Here’s how some of the major states handle bonus pay:

• California: A flat 10.23% applies to most supplemental income, but it jumps to 13.3% for stock options or bonuses over $1 million. 
• New York: Bonuses are taxed as part of total annual income, with rates from 4% to 10.9%, depending on how much your employee earns. If they live in NYC, tack on up to 3.876% more for the city tax.
• Texas & Florida: Good news—no state income tax here! That means bonuses are only hit with federal and FICA taxes.
• Illinois: A flat 4.95% across the board, including bonuses. Easy and predictable.
• Georgia: Uses a tiered system, so bonus taxes range from 1% to 5.75%, depending on total income.
• Connecticut: Keeps it tidy with a 6.99% flat rate on supplemental wages like bonuses.
• States like Wyoming and Nevada don’t have any state income tax at all, so more of an employee’s bonus stays in their pocket.

What’s the difference between the percentage and aggregate method?

The percentage method keeps things simple—you withhold a flat 22% from the bonus, no matter what. 

The aggregate method takes a bit more math. You add the bonus to the employee’s regular paycheck, figure out the tax on the total, then back out what’s owed just on the bonus. 

It can be more accurate (especially for employees in lower tax brackets), but it’s also a bit more work.

What do I do if a bonus wasn't reported?

If a bonus wasn't reported, you’ll want to fix it as soon as you can. Start by double-checking your payroll records to confirm the error. If it’s legit, you’ll need to issue a corrected W-2 (called a W-2c) and send it to both the IRS and your employee. 

Be sure to loop in the employee so they know what’s going on and have the right forms for tax time. A little cleanup now saves a bigger complication later.

Can I process bonus payroll through payroll software like Homebase?

You sure can! Small business payroll software like Homebase can run a bonus payroll quickly and easily. If you choose the percentage method, here’s how to do it:

1. In your Payroll dashboard, click Payroll Runs on the left dashboard.
2. Under Payroll Actions to the right of the screen, click Run off-cycle payroll.
3. This screen is where you choose which team members to include and the reason for the payroll (like bonuses).
4. Select the pay period and payday and choose whether to enter hours manually or import time cards.
5. You can then add time off, other earnings, and tips.
6. Hit Next to review and submit the run. Homebase will make sure that everything adds up correctly for you.

If you choose to use the aggregate method, Homebase lets you run this kind of payroll just as easily:

1. In your Payroll dashboard, click Payroll Runs on the left dashboard.
2. Click the green button near the top of the screen that reads Run Payroll or Resume Payroll.
3. On the page that appears, you’ll see a list of your team members.
4. For each team member, you have the option to click +Add under the Other Earnings column.
5. For each team member you want to add a bonus for, hit +Add and enter the dollar amount in the Bonus box.
6. Hit Save or the Enter key.
7. The bonus amount will show up in the Other Earnings column for each team member.
8. Hit Next, and Homebase will take care of and check all the calculations.