Saving & Spending Taxes

How To Avoid Taxes on Bonus Checks: [2024] Guide

You worked hard for your bonus check — find out how bonuses are taxed so you can give more money to yourself rather than the IRS.

By Roger Wohlner
and Ashley Eneriz

Edited by Melinda Sineriz, ABFP™

Updated Dec. 17, 2024

It’s exciting to get a bonus at work. It’s less exciting to see how much you owe in income taxes on that windfall.

While you can’t necessarily avoid all taxes on a bonus check, you can invest your extra funds in a way that will help you build wealth rather than pay a hefty bill. For example, you can contribute the money to an HSA or 529. There are also ways to plan ahead for a bonus to avoid an income spike, such as deducting retirement and/or charitable contributions (tax-planning strategies you should be using anyway). Understanding how bonuses are taxed and which strategies legally allow you to minimize tax implications is important, and you’ll learn both here.

How are bonuses taxed?

How bonuses are taxed depends on how an employer chooses to pay them. There are two methods for calculating bonus taxes: the percentage method and the aggregate method.

If your bonus is distributed separately from your regular paycheck, it’s considered supplemental wages and will be taxed at a flat rate of 22% for amounts less than $1 million. This may result in owing more at tax time or getting a refund, depending on your overall tax rate, and it’s known as the percentage method.

If your bonus is distributed as part of a regular paycheck, it will be taxed as regular income. That means it’s based on your normal tax bracket, filing status, and withholding elections for your paycheck. This is known as the aggregate method for calculating bonus taxes.

Warning

Bonuses are subject to state taxes, too, but this can vary by state. If too much in taxes is withheld from your bonus pay, you may get a tax refund depending on your income and filing status.

How regular paychecks are taxed

Taxes are withheld from your regular pay based on information you provide on your Form W-4, including your marital status and number of dependents. You can also request that an additional amount be withheld for federal or state purposes, which can help you when it’s time to file taxes if you tend to owe money.

Your employer will also withhold money to cover additional taxes, such as Medicare and Social Security.

6 ways to avoid taxes on your bonus

You can’t avoid paying taxes on your bonus altogether, but there are legal ways to use your bonus to minimize your overall tax implications or plan your taxes to avoid a bigger bill if you know you’re getting a bonus. These suggestions are all IRS-approved and can help you keep more of your check.

1. Have your bonus combined with your regular paycheck

If your company doesn’t normally pay bonuses as part of a regular payroll check, ask it too. The advantage of this method is that the bonus will be taxed based on your normal withholding rather than the 22% mandated rate for supplemental income. This probably won’t save you more money overall but can help you avoid a surprise bill if your overall tax rate is higher and you have to make up the difference after filing your taxes.

2. Itemize deductions

You may be able to claim many potential deductions if you itemize deductions. These could include:

Charitable contributions: If you want to use your bonus to reduce your taxable income, you can donate some of what you receive to charity. Depending on the size of the bonus, you might want to make the equivalent of several years’ worth of charitable donations this year to take full advantage of potential savings.

Pro tip

You don’t necessarily have to donate your bonus to charity — the idea is just lowering your income. If you anticipate a bonus at the end of the year, you can make charitable contributions throughout the year in preparation to offset the amount you expect.

Medical expenses: If you have higher than normal medical expenses, they can be itemized if they exceed 7.5% of your adjusted gross income (AGI).
Mortgage interest: You can deduct mortgage interest on up to $750,000 of mortgage debt on a primary or second home.
Energy-efficient home improvements: You can qualify for up to $3,200 in tax credits for energy-efficient renovations, including qualifying doors, windows, insulation, central air conditioners, and heaters.

Note that even though itemizing might soften the tax blow of receiving a hefty bonus check, it may not make sense to itemize unless you qualify for a lot of tax credits and deductions. The standard deduction is relatively high ($30,000 for married couples filing jointly and $15,000 for single filers for the 2025 tax year). If your itemized deductions add up to less than this, we recommend taking the standard deduction.

3. Increase your 401(k) contributions

If you aren’t maxing out your contributions to your company’s 401(k) plan or another retirement account, consider using some or all of the bonus to increase these contributions. The 2025 401(k) contribution limit is $23,500, plus $7,500 for those 50 or older.

Besides the tax benefits of a pre-tax contribution to a traditional 401(k) account to mitigate the impact of extra income, this is a great way to boost your savings if you fall behind. The best method for doing this will vary based on your circumstances and the timing of your bonus. Check with your payroll or benefits department to find out if you can contribute directly from the bonus or increase your regular paycheck deductions before the end of the year.

Alternatively, you can consider bumping up your contributions each paycheck to boost your annual contributions and use the money from your bonus check to pay yourself back.

Already maxed out your 401(k)?

Bump up your spouse’s contribution to their 401(k). You’ll need to “front” the money via your spouse’s added payroll deductions and reimburse yourselves once the bonus is received.

4. Increase your IRA contributions

Another way to potentially lower your taxable income from a bonus is to contribute to a traditional individual retirement account (IRA). For 2025, you can contribute up to $7,000 to a traditional IRA (plus $7,000 if you’re 50 or older). You can deduct those contributions from your pre-tax income, which lowers the income you’re taxed on and helps balance out the amount added by your bonus.

If you’re covered by a retirement plan at work, like a 401(k) plan, you can only deduct your IRA contributions if your income is below certain limits. The limit for 2024 is $87,000 for single filers and heads of household and $143,000 for married couples filing jointly.

If your spouse is covered

If you’re not covered by a retirement plan but your spouse is and you file jointly, the income limit for deducting contributions is $240,000 for 2024. At this AGI, you’ll only qualify for a partial deduction.

5. Increase your HSA contributions

If you have a high-deductible health plan (HDHP) for health insurance, you’re eligible to contribute to a health savings account (HSA) tax-free. For 2025, the contribution limit for someone with individual coverage is $4,300 and up to $8,550 for family coverage. There is an additional $1,000 contribution available in both tax years for those 55 or over.

The beauty of an HSA is that the contributions are pre-tax, and the money can be carried over to subsequent years or even to retirement if not needed for medical expenses. Bumping up your HSA contributions can be a good way to use some of the bonus money and offset some of the taxes as well. You can up your contribution at any point of the year.

Pro tip

HSA funds aren’t just good for doctor visits. You can even shop on Amazon with funds for qualified items, such as vitamins, skin care products, and health wearables.

6. Contribute to a 529 plan

Adding funds to a 529 plan, a tax-advantaged savings account for education costs, won’t lower your taxable income. However, depending on your state, you might get a tax break there. Even though parents often use this type of plan as their child’s future college account, you don’t need to have a child already or use it only for higher education.

529 plan funds can be used for K-12 private education costs for your kids, or you can even use the money to send yourself back to school for a certificate or graduate degree. Additionally, up to $10,000 can be used to repay student loan debt and roll over excess funds to a Roth IRA.

FAQs

Can you give an employee a bonus without taxes?

You can’t give an employee a bonus without taxes. The IRS mandates that taxes be withheld from a bonus payment at either their regular federal withholding rate if it’s paid with their regular wages or at the 22% supplemental rate.

What is the tax rate on bonuses?

The tax rate on bonuses is 22% for federal taxes if the bonus check is made as a separate payment from a regular paycheck. If the bonus is included as part of a regular paycheck, then the withholding in place for your regular salary would apply.

Can you claim a bonus as a tax deduction?

You can’t claim a bonus as a tax deduction. The employer paying the bonus can claim it as a payroll expense just like other compensation paid to employees.

Bottom line

Receiving a bonus is a great thing. Having to pay federal income tax (along with state and local taxes) on the bonus isn’t as great, but it’s a requirement. Managing your potential tax bill is important, and there are a number of steps to consider.

It’s best to focus on your overall tax situation when deciding how to handle your bonus tax situation. Check out our article on the best tax software to assist you if you file your tax return on your own or seek out the assistance of a tax advisor.