How to Calculate Payroll Taxes on Bonuses, Tips, Overtime, and Termination Pay
Bonuses, overtime, and severance are wages, so income tax withholding, Social Security and Medicare tax, and FUTA (federal unemployment tax) apply to them, and so do cash tips once an employee reports $20 or more in a month. Three checks drive the calculation, namely each tax’s wage base, the withholding method for supplemental pay, and which deductions reduce which tax.
Each payroll tax has its own taxable wage base
The figures below are as of October 2026 (IRS Publication 15 (2026); Form 941 instructions (Rev. 03/2026)).
Tax
Rate
Wage base
Social Security
6.2% each, employer and employee
Wages up to $184,500 in 2026
Medicare
1.45% each, employer and employee
No cap
Additional Medicare Tax
0.9%, employee only
Withheld once wages and tips pass $200,000 in the calendar year
FUTA
6.0%, employer only, less a credit of up to 5.4% where it applies
First $7,000 paid to each employee (a state base may differ)
Income tax withholding
Set by the employee’s Form W-4 for regular wages
Figured under Publication 15-T
Form 941 line 5a, which covers Social Security wages, says, “Enter the amount before payroll deductions.” A bonus paid after an employee’s year-to-date wages pass the Social Security base owes Medicare tax and income tax withholding but no further Social Security tax that year. The Social Security Administration lists $192,300 as the 2027 base.
The withholding method for a bonus depends on how you pay it
Supplemental wages are payments that are not regular wages, including bonuses, commissions, overtime pay, severance, back pay, reported tips, and retroactive pay increases. Under IRS Publication 15 (2026), section 7, a bonus combined with regular wages, with the amounts not specified, is withheld as if the total were one payment.
As of October 2026, you may use the flat 22% rate or the aggregate method for a bonus paid separately, or with each amount specified, when income tax was withheld from regular wages in the current or preceding calendar year. The flat rate is optional, and without that withholding the aggregate method is required. The aggregate method adds the bonus to the regular wages for the current payroll period (or the preceding period if none), figures withholding on the total using the employee’s Form W-4 and Publication 15-T (2026), subtracts tax already withheld, and withholds the rest. The 37% rate is mandatory on the part of one employee’s supplemental wages above $1 million in a calendar year, counting all businesses under common control (26 CFR 31.3402(g)-1). You may also treat reported tips and legally required overtime pay as regular wages. Whatever the income tax method, supplemental wages stay subject to Social Security, Medicare, and FUTA within each tax’s wage base.
Hypothetical A (flat rate). A $1,000 bonus is paid separately to an employee whose regular wages have had income tax withheld this year and whose year-to-date wages, before and after the bonus, are between $7,000 and $184,500. Income tax at 22% is $220.00, employee Social Security is $62.00, and employee Medicare is $14.50. Federal withholding totals $296.50, leaving $703.50 before state, local, and other deductions. The employer share is $76.50 ($62.00 Social Security plus $14.50 Medicare). No FUTA is due on this bonus because the employee’s FUTA wages are already past $7,000.
Hypotheticals B1 and B2. B1 uses Publication 15’s own example (wage bracket method, single filer, $2,000 monthly salary with $65 withheld, and a $1,000 bonus). The aggregate method taxes $3,000 ($179) and subtracts the $65, so $114 is withheld on the bonus, and the flat rate’s $220 withholds $106 more. B2 uses the 2026 Publication 15-T percentage method for a higher earner (single filer, no other Form W-4 entries, $12,000 monthly salary, $10,000 bonus), where the aggregate withholding on the bonus is $2,707.50 and the flat rate’s $2,200.00 withholds $507.50 less. Final tax is figured on the employee’s return.
Pre-tax deductions do not all reduce the same taxes
The table below is as of October 2026, per IRS Publication 15 (2026), section 15 and Publication 15-B.
Deduction
Income tax withholding
Social Security and Medicare
FUTA
401(k) elective deferrals
Generally exempt
Taxable
Taxable
Section 125 cafeteria plan accident and health benefits
Exempt, except for 2% S corporation shareholder-employees
Exempt
Exempt
Employer HSA contributions, if reasonably expected to be excludable
Exempt
Exempt
Exempt
Tips, overtime, and termination pay each have their own tax rules
Tips. An employee reports cash tips to you in a signed statement, on paper or electronically, by the 10th of the month after receipt, and no report is required for months when tips are less than $20 (Publication 15 (2026), section 6; 26 CFR 31.6053-1). You collect the employee’s Social Security, Medicare, and income tax on tips from the employee’s wages or other funds the employee supplies, and you owe your own Social Security and Medicare share on reported tips.
Hypothetical C. $1,400 in wages and $900 in cash tips reported on time, using the optional flat rate on tips because income tax is withheld from the regular wages. Employee Social Security on the tips is $55.80 and Medicare is $13.05 (together $68.85), and you owe a matching $68.85. Flat-rate income tax on the tips is $198.00, so the employee’s taxes on the tips total $266.85, collected from the wages.
As of October 2026, the FICA tip credit generally equals 7.65% of creditable tips on which you paid Social Security and Medicare, covers food or beverage service where tipping is customary and, for tax years beginning after 2024, barbering and hair care, nail care, esthetics, and body and spa treatments, and is claimed on the income tax return, not Form 941 (Form 8846). Tips used to bring wages up to $5.15 an hour (food and beverage) or $7.25 (beauty services) are not creditable.
Overtime. Overtime is wages for income tax withholding, Social Security, Medicare, and FUTA, and you may withhold on required overtime pay as regular or supplemental wages (Publication 15 (2026)). A bonus outside the statutory exclusions, such as a nondiscretionary attendance bonus, must be totaled into the Fair Labor Standards Act regular rate (29 CFR 778.208; 778.211). Hypothetical D. A nonexempt employee earns $20 an hour for 50 hours plus a $100 weekly attendance bonus, so the regular rate is $22.00 ($1,000 in hourly pay plus the $100 bonus, divided by 50 hours). The overtime premium is 0.5 x $22.00 x 10 hours, or $110.00, and gross pay is $1,210.00. Without the bonus, the premium is $100.00.
Termination pay. Severance and dismissal pay are wages for income tax withholding, Social Security, Medicare, and FUTA (Publication 15 (2026)). Dismissal pay is wages for withholding whether or not the employer is legally bound to pay it (26 CFR 31.3401(a)-1). Severance, a lump-sum payout of unused vacation, back pay, and retroactive pay increases are supplemental wages, so the withholding rules above apply to them. The U.S. Department of Labor says federal law does not require an immediate final paycheck, while “Some states, however, may require immediate payment.”
The 2025 law. Under P.L. 119-21, qualified tips and qualified overtime are capped federal income tax deductions the employee claims on a tax return for 2025 through 2028, and the pay is still subject to employer and employee Social Security and Medicare tax (IRS Publication 15 (2026)). Employers use the employee’s updated Form W-4 and the procedures in Publication 15-T for either deduction, and the IRS says an employer may not reduce withholding for the overtime deduction without that form (FS-2026-13). An employee who wants withholding to reflect the deduction estimates it in Step 4(b) of the 2026 Form W-4. For 2026 wages, Form W-2 box 12 code TT reports qualified overtime (only the premium half, $110.00 for the week in hypothetical D), code TP reports cash tips reported to the employer, and box 14b carries the tipped occupation code (W-2/W-3 instructions). Notice 2025-62 gave information-reporting penalty relief for 2025 only, and the Form 941 instructions add no new line for tips or overtime.
Five steps to check every special payment before you run payroll
What you need first. The payment’s pay type, the employee’s current Form W-4, the regular wages paid for the period, the employee’s deduction elections, and any signed tip statements.
1. Classify the pay type, such as bonus, tips, overtime, severance, vacation payout, or back pay.
2. Find the wage base for each tax and how much of it the employee’s year-to-date wages already use.
3. Apply each deduction only to the taxes it reduces.
4. Choose the income tax withholding method on purpose and record it for the payment, where the flat-or-aggregate choice exists.
5. Keep tip statements and Forms W-4, and compare the year’s Form 941 totals with the Form W-3 totals.
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Frequently asked questions
Are employer payroll taxes owed on employee bonuses?
Yes, a bonus is subject to the employer’s share of Social Security and Medicare tax and to FUTA, within each tax’s wage base (IRS Publication 15 (2026)). The flat-or-aggregate choice affects only the employee’s income tax withholding, not the employer’s taxes.
Are tips subject to FICA payroll taxes?
Yes, once an employee reports $20 or more in cash tips in a month, those tips are subject to employee and employer Social Security and Medicare tax (IRS Publication 15 (2026)). The FICA tip credit on Form 8846 may be available to food, beverage, and beauty service employers.
Is payroll tax calculated on gross or net wages?
Federal payroll taxes start from gross wages, meaning wages before payroll deductions, and each tax then excludes its own items (Form 941 instructions). 401(k) deferrals reduce income tax wages but not Social Security, Medicare, or FUTA wages, while Section 125 accident and health benefits reduce all four, except income tax withholding for 2% S corporation shareholder-employees (Publication 15 (2026)).
How is federal withholding calculated on a bonus?
A bonus paid separately may use the flat 22% rate or the aggregate method when income tax was withheld from regular wages this year or last, and the aggregate method is required otherwise (IRS Publication 15 (2026), section 7). Above $1 million in supplemental wages paid to one employee in a calendar year, 37% withholding is mandatory on the excess.
Are termination payments subject to payroll taxes?
Yes, severance, dismissal pay, and a lump-sum payout of unused vacation are wages subject to income tax withholding, Social Security, Medicare, and FUTA within each tax’s wage base (IRS Publication 15 (2026)).
Does overtime pay get taxed at a higher rate?
Overtime has no separate income tax rate, though withholding can differ. Overtime is wages subject to income tax withholding, Social Security, Medicare, and FUTA, and the employer may withhold on required overtime pay as regular or supplemental wages (IRS Publication 15 (2026)). A larger paycheck raises that period’s withholding, but the employee’s actual tax is figured on the return.
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