Holiday Bonus Withholding in 2026: The 22% Flat Rate, Aggregate Method and Payroll Taxes
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How we wrote this: A plain-English summary of IRS Publication 15 (2026), Employer's Tax Guide, section 7, checked October 29, 2026. It covers federal withholding only. State rules vary. This is general information, not tax advice.
Bonuses are supplemental wages
Pub. 15 says supplemental wages are payments that aren't regular wages. They include bonuses, commissions, awards, prizes, severance pay, back pay and retroactive raises. Taxable fringe benefits also follow the supplemental wage rules (see holiday gifts and parties for employees).
The 2026 rates
For 2026, Pub. 15 says the supplemental withholding rate remains 22%, or 37% on supplemental wages over $1 million paid to one employee in the calendar year. P.L. 119-21 permanently extended the individual rates, so the rate didn't change.
Choosing a method
If you pay the bonus together with regular wages without listing each amount, withhold as if the total were one regular payroll payment.
If you pay it separately, or list each amount, the method depends on whether you withheld income tax from the employee's regular wages this year or last year:
- If you did, you can choose:
- Method 1a (flat rate): withhold a flat 22% on the bonus. Pub. 15 says no other percentage is allowed.
- Method 1b (aggregate): add the bonus to the regular wages for the current or previous payroll period, figure withholding on the total using Pub. 15-T, and subtract what was already withheld from the regular wages.
- If you didn't, you must use the aggregate method (1b).
Over $1 million: the portion above $1 million (counting all businesses under common control) is withheld at 37%, regardless of the employee's Form W-4.
Payroll taxes still apply
Whatever method you use, Pub. 15 says supplemental wages are subject to Social Security, Medicare and FUTA taxes. For 2026, Social Security is 6.2% each for employer and employee up to the $184,500 wage base, and Medicare is 1.45% each with no wage base limit.
Year-end checklist
- Decide on flat or aggregate before the payroll run.
- Remember that gift cards and cash are wages, not tax-free gifts.
- Bonuses go on the employee's Form W-2. See W-2 and 1099 deadlines and Form 941 quarterly payroll basics.