How to Handle a Bonus Check with Payroll

Employers should always be looking into any advantage available to them in order to attract and retain top talent in today's competitive hiring landscape. Above market wages and strong benefits are some of the top ways for businesses to stand out above the competition. Once a business is financially stable, providing bonuses to its employees covers both of these important categories. Handing out bonuses does come with some compliance challenges for employers, however. 

In this article, we will walk through what a bonus actually is, the different types of bonuses you can offer, how to handle bonus checks through payroll, and how the taxes work. By the end, you should feel confident running your next bonus payroll without second-guessing yourself. 

Let's begin.

Key Takeaways from this Article

• A bonus check is any additional compensation paid to an employee beyond their regular wages, and the IRS treats it as supplemental income that must be taxed.
• You can pay bonuses two ways through payroll, including the aggregate method, where the bonus is added to a regular paycheck, or the percentage method, where the bonus is paid as a separate check taxed at a flat 22% federal rate.
• Bonus checks are subject to FICA, federal income tax, and state income tax, and the employer is still responsible for paying their share of FICA, FUTA, and SUTA.
• If you want employees to receive a specific take-home amount, you will need to gross-up the bonus to cover the taxes.
• For year-end bonuses to land on this year's W-2, the check date must be on or before December 31.

What is a Bonus?

A bonus is any additional compensation that is provided to employees above their normal pay. This can be in the form of money, gift cards, or other additional rewards that an employee does not normally receive. These can be given to employees when they perform their duties above expectation or as a gift around the holidays.

Bonuses are considered either discretionary or non-discretionary. One benefit of providing bonuses to employees is improving employee morale. Happy and engaged employees are more likely to stay with their company. Additionally, a high workforce morale produces better end results for your business. 

Types of Bonuses

There is no single right way to give a bonus. The type you choose depends on your goals, your budget, and the message you want to send to your team. Here are three of the most common types we see Maine business owners use:

Year-End or Annual Bonuses

These are the bonuses most people think of when they hear the word. A year-end bonus is typically paid in December or early January and is often tied to company performance, individual performance, or a combination of both. Some businesses use a flat dollar amount, while others use a percentage of the employee's annual salary. Year-end bonuses are a great way to share a profitable year with your team, and they tend to carry a lot of weight when it comes to retention.

Holiday Bonuses

A holiday bonus is usually a smaller, across-the-board thank-you given during the holiday season. Unlike a year-end bonus, which often varies based on performance or role, a holiday bonus is typically the same amount for every employee or scaled simply by tenure. Think of it as a gesture of appreciation rather than a reward tied to specific metrics. Some small businesses give a flat $100 to $500 per employee, while others offer a week of extra pay.

Retention Bonuses

A retention bonus is a payment promised to an employee if they stay with the company for a certain period of time. These are common when a business is going through a transition, such as an ownership change, a major project, or a busy season where losing key staff would hurt. Retention bonuses are non-discretionary by nature, since they are tied to a specific condition, so be sure to put the terms in writing and account for them properly in your payroll system.

How to Handle Bonuses for Payroll

When it comes time to actually run the bonus through payroll, you have two main options. The method you choose affects how the bonus is taxed, so it is worth understanding both before you process anything.

The Aggregate Method

With the aggregate method, the bonus is added directly to the employee's regular paycheck. The bonus and the regular wages are combined into one total, and taxes are calculated on the full amount as if it were a single, larger paycheck.

Here is what that looks like:

This method is simple to set up, but it can push the employee's withholding higher than usual for that pay period, since payroll software treats the larger paycheck as if it represents the employee's normal earnings.

The Percentage Method

With the percentage method, the bonus is processed as a completely separate paycheck. The employee receives two checks during that pay period, one for their normal wages and a second one just for the bonus.

Here is an example:

The percentage method keeps your regular payroll clean and makes the bonus easy to track on reports. It also applies a flat tax rate to the bonus, which we will get into next.

Calculating Taxes on Bonus Checks

The IRS classifies bonuses as supplemental wages, which means they are taxed differently than regular pay. How they get taxed depends on which method you choose above.

Percentage Method

If you run the bonus as a separate check, federal income tax is withheld at a flat rate of 22%. For any portion of a bonus that exceeds $1 million in a calendar year, the rate jumps to 37% on the amount over that threshold. In other words, the first $1 million is taxed at 22%, and anything above that is taxed at 37%.

Bonus checks are also subject to FICA taxes, which cover Social Security and Medicare, as well as any applicable state income tax withholding. As the employer, you are also responsible for your share of FICA, plus Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) on the bonus amount.

Aggregate Method

If you add the bonus to a regular paycheck, federal income tax withholding is calculated a little differently. The process looks like this:

1. Calculate the federal income tax to withhold on the total combined amount, including the regular wages plus the bonus.
2. Calculate the federal income tax that would normally be withheld on just the regular wages.
3. Subtract the second number from the first. The difference is the amount you withhold from the bonus portion.

Most payroll software handles this calculation automatically, but it helps to understand what is happening behind the scenes. The aggregate method can result in higher withholding than the flat 22%, especially if the employee is in a higher tax bracket.

Bonus Gross-Up

One common scenario occurs when you want every employee to walk away with a clean $500 in their pocket. You run the bonus, taxes get withheld, and the employee ends up with closer to $350.

The fix is a tax gross-up. A gross-up means you increase the bonus amount so that after all the taxes come out, the employee receives the exact take-home amount you intended. So instead of paying a $500 bonus, you might run a bonus closer to $700 through payroll so the employee actually takes home $500.

This is a great option for holiday bonuses, where part of the appeal is the simplicity of handing someone a round number. Just keep in mind that the gross-up increases your total payroll cost, so make sure it fits your budget before committing to it.

FAQs: Bonus Checks for Employees

Are bonus payments taxable?

Yes. The IRS considers bonuses to be supplemental wages, which means they are subject to federal income tax, FICA taxes, and any applicable state income tax. Cash bonuses, bonus checks, and even cash equivalents like gift cards are all taxable. The only exception is a small category called de minimis fringe benefits, which includes things like occasional holiday gifts, snacks, or small tokens of appreciation that are too minor to reasonably track.

How do you determine bonuses for employees?

There is no one-size-fits-all formula. Some businesses use a flat dollar amount across the board, while others tie bonuses to company performance, individual performance, or a percentage of salary. We recommend creating a written bonus plan that outlines who is eligible, how the bonus is calculated, and when it will be paid. Putting it in writing protects both you and your employees and avoids confusion down the road.

How do you calculate bonus pay?

Start by deciding on the gross bonus amount, meaning the total before any taxes are withheld. Then determine whether you will use the aggregate method or the percentage method to process it. If you want employees to receive a specific take-home amount, you will need to gross-up the bonus to account for the taxes that will be withheld. Your payroll provider can help you run the numbers either way.

When do companies give bonuses?

Most businesses follow some kind of bonus payment schedule that ties to their fiscal year, busy season, or specific milestones. Year-end bonuses are the most common and typically go out in December or early January. Some companies pay quarterly performance bonuses, while others pay them right after a big project wraps up. The key is consistency. Employees appreciate knowing when to expect a bonus, and a predictable schedule helps with both retention and your own budgeting. Remember, if you want a bonus to count on the current year's W-2, the check date must be on or before December 31.

How is the bonus paid?

A bonus can be paid as part of a regular paycheck using the aggregate method, or as a separate check using the percentage method. Both run through payroll, both are subject to taxes, and both show up on the employee's W-2 at year-end. Bonuses should never be paid through a 1099, as they are wages and need to be reported as such. Whichever method you choose, the payment should always go through your payroll system so that taxes are properly withheld and reported.

What are the rules for bonuses?

The biggest rule is that bonuses must be run through payroll and taxed as supplemental wages. Beyond that, employers need to be aware of a few other things. Non-discretionary bonuses, which are bonuses promised in advance or tied to performance goals, must be included in the regular rate of pay when calculating overtime for non-exempt employees. Bonuses can also affect 401(k) contributions depending on how your plan is written, so check with your plan administrator before processing. And if you operate in multiple states, be sure to confirm any state-specific rules around bonus timing or payment.

Conclusion

Bonus checks are one of the most rewarding things you can do as a business owner. They show your team that their work matters, and they go a long way toward building loyalty and morale. But the payroll and tax side of bonuses has a few moving parts, and getting them right is what keeps a thoughtful gesture from turning into a compliance issue.  Following this guide will help.

Updated: May 2026

Written by: Jon Portanova