Overtime and Bonuses (2025): Taxes, Withholding, and Real Take‑Home

Quick Answer: How Are Overtime, Bonuses, and Commissions Taxed?

Bonuses and commissions are “supplemental wages.” Employers may use a flat percentage or an aggregate method to withhold, which can make that check look different; your true tax is reconciled at filing time.

What counts as supplemental wages? Common examples include bonuses (discretionary and nondiscretionary), commissions, retroactive pay increases, back pay, payouts of unused PTO, severance, prizes and awards processed through payroll, and certain taxable fringe benefits. Employers choose a permitted withholding method and may pay the amount with your regular wages or in a separate payment.

Overtime Basics

• Non‑exempt hourly employees are generally paid time‑and‑a‑half for hours over 40 in a workweek (state rules may vary; some employers offer double time in specific situations).
• Overtime increases gross pay, which can increase taxes withheld on that paycheck.

Overtime math: 40 hours × base rate + OT hours × 1.5 × base rate = gross for the period → pre‑tax deductions → taxes → net.

Your regular rate drives OT

Overtime is based on your regular rate, which can be higher than your base rate if you earn nondiscretionary bonuses, shift differentials, piece‑rate pay, or commissions. If a nondiscretionary bonus covers multiple weeks, employers may need to allocate it to each week and pay additional overtime premium for weeks with OT because the bonus raises the regular rate.

Salaried non‑exempt workers

Some employees receive a salary but are non‑exempt. In that case, the employer usually converts the salary to an hourly equivalent to determine the regular rate, then pays the required overtime premium for hours over the threshold. Policies and details vary, check your handbook or speak with payroll/HR.

State variations

Several states and localities require daily overtime or have additional rules (for example, daily OT after a certain number of hours or special seventh‑day rules). These can trigger overtime even if you do not exceed 40 hours in the week. Your calculator results will differ if daily OT applies where you work.

Supplemental Pay (Bonuses, Commissions, Retro Pay)

Employers can withhold on supplemental wages using IRS‑approved methods. Two common approaches (federal):

• Flat/percentage method: As of 2025, 22% federal withholding applies to supplemental wages up to $1,000,000 for the year; any supplemental wages above $1,000,000 are withheld at 37%. This is only withholding, your annual return determines your actual tax. State/local rules may differ.
• Aggregate method: The employer combines the supplemental amount with your regular wages for that period and withholds as if it were one larger paycheck.

Which method is used can change how your check looks, but not your final annual tax.

Paid separately vs. combined

Paying a bonus or commission in a separate check often leads payroll systems to use the flat/percentage method. Combining it with your regular wages may cause the aggregate method to apply. Either way, your annual tax is based on your total income and deductions, not the method used on a single check.

Large supplemental wages

Very large supplemental payments (over $1,000,000 in a year to the same employee) are subject to a 37% federal supplemental withholding rate on the excess, purely for withholding. High earners should also watch the Social Security wage base (OASDI stops after the annual limit) and the Additional Medicare Tax that applies above certain thresholds. Employers must begin Additional Medicare withholding after an employee’s Medicare wages with that employer exceed $200,000; your final Additional Medicare liability depends on filing status and total Medicare wages across all employers.

FICA still applies

Overtime, bonuses, and commissions are generally subject to Social Security and Medicare. Employee Social Security tax is 6.2% up to the annual wage base; Medicare is 1.45% with no wage base cap, plus a 0.9% Additional Medicare Tax above the statutory thresholds. Traditional 401(k) contributions reduce income‑taxable wages but do not reduce FICA wages; Roth 401(k) contributions are after‑tax and reduce neither. Cafeteria‑plan premiums, HSAs/FSAs under Section 125, and certain transit/parking benefits often reduce both income and FICA wages. State rules may differ.

State Considerations (At a Glance)

• Some states mirror federal supplemental methods; others set their own rules and/or rates.
• Local taxes may apply in certain cities or localities.
• Check your state’s current withholding guidance for supplemental wages.

States also vary on what qualifies as pre‑tax for state income tax, and how cafeteria‑plan premiums, HSAs/FSAs, and commuter benefits are treated. If you live and work in different states, review reciprocity agreements and whether local taxes (e.g., certain cities) apply based on residence or work location.

Planning Tips

• Update your W‑4 around big bonuses/commission cycles if needed (use Step 4(c) for extra withholding or revisit 4(a)/4(b)).
• Consider pre‑tax contributions timing (e.g., HSA/401(k)) if you want to lower taxable wages for a given period.
• Use the calculator to preview net differences before you submit changes to HR.
• Watch the Social Security wage base and any Additional Medicare tax thresholds if your YTD income is approaching limits.

Smoothing cash‑flow swings

If commissions or bonuses are lumpy, you can request a steady extra withholding amount in W‑4 Step 4(c), then turn it off after payout. Another approach is to set aside a fixed percentage of supplemental pay in savings to cover taxes and quarterly needs.

Pre‑tax nuance

Not all pre‑tax deductions reduce all taxes. For example, 401(k) contributions reduce federal/state taxable wages but usually not FICA; cafeteria‑plan health premiums often reduce both; HSA contributions made via payroll under a Section 125 plan typically reduce both, but HSA contributions made outside payroll do not reduce FICA. Always check plan documents and your pay stub’s taxable wages lines.

Examples

Frequently Asked Questions

Troubleshooting and Tips

• Confirm whether your employer uses flat or aggregate withholding for supplemental pay and how your state treats it.
• Use our calculator to model overtime hours, bonuses, and commissions before they hit payroll.
• Keep an eye on the Social Security wage base (OASDI stops once you hit it) and Additional Medicare thresholds if your YTD wages are high.
• Verify pre‑tax deductions (401(k), HSA/FSA, health) are correctly applied in payroll to avoid surprises.
• If you have multiple jobs, use W‑4 Step 2 so each employer withholds appropriately; otherwise you can be under‑withheld overall.
• Bonuses with clawback provisions can be tricky, ask payroll how taxes are handled if a bonus must be repaid later.

References

• IRS Publication 15‑T (Federal Income Tax Withholding Methods) — Supplemental wage withholding rules (flat and aggregate methods).
• IRS Additional Medicare Tax — 0.9% additional Medicare tax rules and thresholds.
• IRS Publication 15 (Employer’s Tax Guide) — FICA wage definitions, rates, and general payroll rules.
• U.S. DOL Fact Sheet #23: Overtime Pay — Regular rate, nondiscretionary bonuses, and OT premiums.
• 29 CFR Part 778 — Overtime compensation, including regular‑rate calculations.
• SSA: Contribution and Benefit Base — Annual Social Security wage base.
• Current state/local payroll tax guidance from your state revenue or labor department.