The percentage method is simplest—your employer issues your bonus and withholds taxes at the 22% flat rate—or the higher rate if your bonus is over $1 million. For example, if you normally withhold 35% of your pay for income taxes, the amount of withholding on your bonus would also be 35%.

Your bonus is taxed at the same rate as all of your other income. If you’re in the 33% tax bracket and you receive a bonus of $100,000, you will pay $33,000 in federal taxes. Since your employer may withhold more or less than the actual amount you will pay, this will get sorted out when you pay your taxes.

Why bonuses are taxed so high It comes down to what’s called “supplemental income.” Although all of your earned dollars are equal at tax time, when bonuses are issued, they’re considered supplemental income by the IRS and held to a higher withholding rate.

A bonus is always a welcome bump in pay, but it’s taxed differently from regular income. Instead of adding it to your ordinary income and taxing it at your top marginal tax rate, the IRS considers bonuses to be “supplemental wages” and levies a flat 22 percent federal withholding rate.

Bonus of any type such as performance linked, sales target linked, ratings linked and incentive schemes are fully taxable. All such receipts are taxed under ‘income from other sources’ in your income tax return. Such incomes are taxed at a flat rate of 30%, which after adding 4% cess will amount to 31.2%.

Ask your employer or benefits department which method it uses for withholding on bonuses. If you have a choice, request the percentage method. Calculate your tax bracket with the bonus included. If the bonus would push you into a higher bracket, figure out how much more tax that would cause to be withheld on your regular income.

Use this bonus taxation calculator to figure out how much tax you’d pay on the amount of your bonus using either method, so you can know exactly how much money to expect. While you can’t avoid paying taxes on your bonus entirely, you can use your bonus funds wisely to reduce how much you’ll owe at tax time.

First, your employer calculates the normal withholding amount for your entire paycheck. Then it subtracts what was withheld from your last paycheck from your current withholding. The rest is withheld from your bonus.

Your best strategy is to ask for the bonus in a separate check from your salary. Then ask your employer to use the IRS “supplemental wages rate” of 22%. The employer will be in compliance with tax law, and you’ll get more money. You could also request that the bonus be given to you after the end of the year.