How Do End of Year Bonuses Work?
End-of-year is officially “bonus season,” and that means turning what used to be a stressful, spreadsheet-filled ritual into something simple, transparent, and even a little fun. This guide walks through how different types of bonuses work, why everyone obsesses over “bonus taxes,” a few wild historical bonus moments, and a practical checklist for both employers and employees.
Bonus Season
As the calendar winds down, many businesses use bonuses to say “thank you” for a year’s worth of work, whether that is tied to performance, profits, or pure holiday goodwill. Payroll and finance teams, meanwhile, are juggling year-end reporting, tight timelines, and a surge of special payouts, which is exactly when errors and tax confusion tend to creep in.
The good news is that with a clear bonus policy, consistent criteria, and solid payroll processes, bonus season can feel like a celebration instead of a compliance fire drill.
Common Types of Bonuses
“Bonus” is a single word that covers a lot of different use cases. In practice, most companies use a mix of:
Performance bonuses: Rewards tied to KPIs, revenue targets, project milestones, or individual goals.
Holiday and year-end bonuses: The classic end-of-year “thank you” payment, often sent in December or early January to boost morale and retention.
Spot bonuses: One-off rewards for going above and beyond, such as solving an emergency, rescuing a project, or delivering an exceptional customer experience.
Referral and signing bonuses: Incentives for bringing in great candidates or closing top talent in competitive markets.
Ideally, each of these is clearly documented and labeled in the payroll system so admins can track them over time and employees can see exactly what they received and why on their paystub.
Wild Bonus History: Wall Street-level payouts
Most companies are not handing out eight figure payouts, but the history of bonus season in the financial sector is a great reminder of how big this ritual can get.
In the mid 2000s, a leading investment bank set aside more than $16 billion for salaries, bonuses, and benefits in a single year, with average compensation north of $600,000 per employee, heavily driven by banker and trader bonuses.
Around the same era, its CEO received a record setting pay package reportedly worth more than $50 million for a single year, largely made up of bonus cash and equity.
Even after the financial crisis, regulators reported Wall Street bonus pools in the tens of billions, with average bonuses for securities workers estimated well into six figures.
These numbers grab headlines, but from a tax perspective they are treated the same way as a $1,500 holiday bonus for a small contractor or cafe: they are just wages, paid on top of regular pay, with their own withholding rules.
How Bonuses are Taxed vs Regular Pay (U.S. focused)
From a U.S. tax perspective, bonuses are considered supplemental wages, anything paid in addition to an employee’s regular salary or hourly pay. That includes performance bonuses, holiday bonuses, commissions, referral bonuses, and more.
A few key points:
Bonuses are fully taxable, just like regular wages.
They are generally subject to:
Federal income tax withholding
Social Security and Medicare
State and local taxes, where applicable
The big confusion comes from how income tax is withheld on bonus payments, not from some secret, higher “bonus tax bracket.”
Two main federal withholding methods
Most U.S. employers use one of two approaches for federal income tax withholding on bonuses:
Percentage (flat) method
If a bonus is paid separately and clearly identified as a bonus, federal income tax can be withheld at a flat 22% on total supplemental wages up to $1 million in a calendar year.
If an employee’s bonuses exceed $1 million in a year, the first $1 million is withheld at 22%, and every dollar above that must be withheld at 37%.
Aggregate (combined) method
The employer combines the bonus with the employee’s regular wages for that pay period and calculates withholding as if the entire amount were a single regular paycheck.
The withholding is based on the employee’s W 4 and marginal tax rate, which can make the bonus check look like it is being taxed more or less heavily than 22%.
At tax filing time, all wages and bonuses are added together and taxed under the same annual brackets. If too much was withheld, the employee gets it back as part of a refund. If too little was withheld, they may owe more. The “my bonus got taxed to death” feeling is usually a withholding issue, not a special punishment tax.
How Rollfi makes bonus season easier
Rollfi treats bonuses as a first class part of payroll, not a messy edge case.
With Rollfi, employers can:
Add bonuses as distinct pay items (performance, holiday, spot, referral, and so on) rather than burying them in regular earnings.
Automatically apply appropriate supplemental wage withholding logic for federal income tax, and incorporate state and local rules where required.
Schedule bonuses to run on a specific end-of-year payroll or include them in regular cycles, while keeping everything synced to accounting and reporting.
Give employees clear paystubs that distinguish base pay from bonus amounts, plus all related withholdings.
That transparency alone reduces confusion and tickets to HR or finance about “where my bonus went” because employees can literally see the gross amount, tax withheld, and net amount on a single, clean paystub.
Things to remember: Employer checklist
If you are an employer planning bonuses, here is a quick checklist to keep bonus season smooth, fair, and compliant:
Define the purpose of each bonus: Decide whether each bonus is performance based, profit sharing, retention, or holiday recognition. Label it clearly for employees and accounting.
Document your criteria: Write down how bonuses are calculated (for example, percentage of salary, profit pool formula, KPI achievement) and keep that consistent across the organization.
Choose your withholding approach: Decide whether you will generally use the flat supplemental rate or aggregate method and configure your process to match.
Communicate timing and expectations: Let employees know when the bonus will run, whether it is appearing on a separate check or combined with a normal paycheck, and that taxes and other deductions will reduce the headline number.
Tie into your reporting and budgeting: Track bonus categories, review their impact on labor costs, and make sure your year end and next year’s budgets reflect your actual bonus practices.
Things to remember: Employee checklist
For employees seeing a bonus hit their account, this quick mental checklist can help:
Read the paystub line by line: Confirm that the bonus is listed as its own line, you can see the gross bonus amount, and you understand how much tax and other deductions were taken out.
Expect higher visible withholding on the check: Because of supplemental wage rules or the aggregate method, the bonus paycheck might look like it is taxed more aggressively, even though your final annual tax is determined at filing.
Ask how bonuses are calculated: Understanding the formula and criteria helps you align your goals with how your company rewards performance.
Make a plan for the money: Decide ahead of time whether you are using the bonus for savings, debt payoff, investments, or specific purchases so it does not disappear into everyday spending.
Take the win: Whether it is a modest spot bonus or a big year end payout, a bonus is a concrete acknowledgment of your contributions over the year.
End-of-year bonuses do not have to mean end-of-year chaos. With clear policies, transparent communication, and solid payroll processes, employers can reward their teams in a way that feels fair and understandable, and employees can see exactly what they earned and why, with no mystery and no guesswork.
About Rollfi
Rollfi empowers banks, vertical SaaS platforms, accounting firms, and fintechs to add payroll and benefits to their offerings through white-label solutions and robust APIs. With Rollfi’s infrastructure, platforms can unlock new revenue, boost customer retention, and gain valuable payroll data insights. Fast deployment and full regulatory coverage make Rollfi the easiest way to turn your platform into a one-stop shop for essential business services.
End-of-year is officially “bonus season,” and that means turning what used to be a stressful, spreadsheet-filled ritual into something simple, transparent, and even a little fun. This guide walks through how different types of bonuses work, why everyone obsesses over “bonus taxes,” a few wild historical bonus moments, and a practical checklist for both employers and employees.
Bonus Season
As the calendar winds down, many businesses use bonuses to say “thank you” for a year’s worth of work, whether that is tied to performance, profits, or pure holiday goodwill. Payroll and finance teams, meanwhile, are juggling year-end reporting, tight timelines, and a surge of special payouts, which is exactly when errors and tax confusion tend to creep in.
The good news is that with a clear bonus policy, consistent criteria, and solid payroll processes, bonus season can feel like a celebration instead of a compliance fire drill.
Common Types of Bonuses
“Bonus” is a single word that covers a lot of different use cases. In practice, most companies use a mix of:
Performance bonuses: Rewards tied to KPIs, revenue targets, project milestones, or individual goals.
Holiday and year-end bonuses: The classic end-of-year “thank you” payment, often sent in December or early January to boost morale and retention.
Spot bonuses: One-off rewards for going above and beyond, such as solving an emergency, rescuing a project, or delivering an exceptional customer experience.
Referral and signing bonuses: Incentives for bringing in great candidates or closing top talent in competitive markets.
Ideally, each of these is clearly documented and labeled in the payroll system so admins can track them over time and employees can see exactly what they received and why on their paystub.
Wild Bonus History: Wall Street-level payouts
Most companies are not handing out eight figure payouts, but the history of bonus season in the financial sector is a great reminder of how big this ritual can get.
In the mid 2000s, a leading investment bank set aside more than $16 billion for salaries, bonuses, and benefits in a single year, with average compensation north of $600,000 per employee, heavily driven by banker and trader bonuses.
Around the same era, its CEO received a record setting pay package reportedly worth more than $50 million for a single year, largely made up of bonus cash and equity.
Even after the financial crisis, regulators reported Wall Street bonus pools in the tens of billions, with average bonuses for securities workers estimated well into six figures.
These numbers grab headlines, but from a tax perspective they are treated the same way as a $1,500 holiday bonus for a small contractor or cafe: they are just wages, paid on top of regular pay, with their own withholding rules.
How Bonuses are Taxed vs Regular Pay (U.S. focused)
From a U.S. tax perspective, bonuses are considered supplemental wages, anything paid in addition to an employee’s regular salary or hourly pay. That includes performance bonuses, holiday bonuses, commissions, referral bonuses, and more.
A few key points:
Bonuses are fully taxable, just like regular wages.
They are generally subject to:
Federal income tax withholding
Social Security and Medicare
State and local taxes, where applicable
The big confusion comes from how income tax is withheld on bonus payments, not from some secret, higher “bonus tax bracket.”
Two main federal withholding methods
Most U.S. employers use one of two approaches for federal income tax withholding on bonuses:
Percentage (flat) method
If a bonus is paid separately and clearly identified as a bonus, federal income tax can be withheld at a flat 22% on total supplemental wages up to $1 million in a calendar year.
If an employee’s bonuses exceed $1 million in a year, the first $1 million is withheld at 22%, and every dollar above that must be withheld at 37%.
Aggregate (combined) method
The employer combines the bonus with the employee’s regular wages for that pay period and calculates withholding as if the entire amount were a single regular paycheck.
The withholding is based on the employee’s W 4 and marginal tax rate, which can make the bonus check look like it is being taxed more or less heavily than 22%.
At tax filing time, all wages and bonuses are added together and taxed under the same annual brackets. If too much was withheld, the employee gets it back as part of a refund. If too little was withheld, they may owe more. The “my bonus got taxed to death” feeling is usually a withholding issue, not a special punishment tax.
How Rollfi makes bonus season easier
Rollfi treats bonuses as a first class part of payroll, not a messy edge case.
With Rollfi, employers can:
Add bonuses as distinct pay items (performance, holiday, spot, referral, and so on) rather than burying them in regular earnings.
Automatically apply appropriate supplemental wage withholding logic for federal income tax, and incorporate state and local rules where required.
Schedule bonuses to run on a specific end-of-year payroll or include them in regular cycles, while keeping everything synced to accounting and reporting.
Give employees clear paystubs that distinguish base pay from bonus amounts, plus all related withholdings.
That transparency alone reduces confusion and tickets to HR or finance about “where my bonus went” because employees can literally see the gross amount, tax withheld, and net amount on a single, clean paystub.
Things to remember: Employer checklist
If you are an employer planning bonuses, here is a quick checklist to keep bonus season smooth, fair, and compliant:
Define the purpose of each bonus: Decide whether each bonus is performance based, profit sharing, retention, or holiday recognition. Label it clearly for employees and accounting.
Document your criteria: Write down how bonuses are calculated (for example, percentage of salary, profit pool formula, KPI achievement) and keep that consistent across the organization.
Choose your withholding approach: Decide whether you will generally use the flat supplemental rate or aggregate method and configure your process to match.
Communicate timing and expectations: Let employees know when the bonus will run, whether it is appearing on a separate check or combined with a normal paycheck, and that taxes and other deductions will reduce the headline number.
Tie into your reporting and budgeting: Track bonus categories, review their impact on labor costs, and make sure your year end and next year’s budgets reflect your actual bonus practices.
Things to remember: Employee checklist
For employees seeing a bonus hit their account, this quick mental checklist can help:
Read the paystub line by line: Confirm that the bonus is listed as its own line, you can see the gross bonus amount, and you understand how much tax and other deductions were taken out.
Expect higher visible withholding on the check: Because of supplemental wage rules or the aggregate method, the bonus paycheck might look like it is taxed more aggressively, even though your final annual tax is determined at filing.
Ask how bonuses are calculated: Understanding the formula and criteria helps you align your goals with how your company rewards performance.
Make a plan for the money: Decide ahead of time whether you are using the bonus for savings, debt payoff, investments, or specific purchases so it does not disappear into everyday spending.
Take the win: Whether it is a modest spot bonus or a big year end payout, a bonus is a concrete acknowledgment of your contributions over the year.
End-of-year bonuses do not have to mean end-of-year chaos. With clear policies, transparent communication, and solid payroll processes, employers can reward their teams in a way that feels fair and understandable, and employees can see exactly what they earned and why, with no mystery and no guesswork.
About Rollfi
Rollfi empowers banks, vertical SaaS platforms, accounting firms, and fintechs to add payroll and benefits to their offerings through white-label solutions and robust APIs. With Rollfi’s infrastructure, platforms can unlock new revenue, boost customer retention, and gain valuable payroll data insights. Fast deployment and full regulatory coverage make Rollfi the easiest way to turn your platform into a one-stop shop for essential business services.
End-of-year is officially “bonus season,” and that means turning what used to be a stressful, spreadsheet-filled ritual into something simple, transparent, and even a little fun. This guide walks through how different types of bonuses work, why everyone obsesses over “bonus taxes,” a few wild historical bonus moments, and a practical checklist for both employers and employees.
Bonus Season
As the calendar winds down, many businesses use bonuses to say “thank you” for a year’s worth of work, whether that is tied to performance, profits, or pure holiday goodwill. Payroll and finance teams, meanwhile, are juggling year-end reporting, tight timelines, and a surge of special payouts, which is exactly when errors and tax confusion tend to creep in.
The good news is that with a clear bonus policy, consistent criteria, and solid payroll processes, bonus season can feel like a celebration instead of a compliance fire drill.
Common Types of Bonuses
“Bonus” is a single word that covers a lot of different use cases. In practice, most companies use a mix of:
Performance bonuses: Rewards tied to KPIs, revenue targets, project milestones, or individual goals.
Holiday and year-end bonuses: The classic end-of-year “thank you” payment, often sent in December or early January to boost morale and retention.
Spot bonuses: One-off rewards for going above and beyond, such as solving an emergency, rescuing a project, or delivering an exceptional customer experience.
Referral and signing bonuses: Incentives for bringing in great candidates or closing top talent in competitive markets.
Ideally, each of these is clearly documented and labeled in the payroll system so admins can track them over time and employees can see exactly what they received and why on their paystub.
Wild Bonus History: Wall Street-level payouts
Most companies are not handing out eight figure payouts, but the history of bonus season in the financial sector is a great reminder of how big this ritual can get.
In the mid 2000s, a leading investment bank set aside more than $16 billion for salaries, bonuses, and benefits in a single year, with average compensation north of $600,000 per employee, heavily driven by banker and trader bonuses.
Around the same era, its CEO received a record setting pay package reportedly worth more than $50 million for a single year, largely made up of bonus cash and equity.
Even after the financial crisis, regulators reported Wall Street bonus pools in the tens of billions, with average bonuses for securities workers estimated well into six figures.
These numbers grab headlines, but from a tax perspective they are treated the same way as a $1,500 holiday bonus for a small contractor or cafe: they are just wages, paid on top of regular pay, with their own withholding rules.
How Bonuses are Taxed vs Regular Pay (U.S. focused)
From a U.S. tax perspective, bonuses are considered supplemental wages, anything paid in addition to an employee’s regular salary or hourly pay. That includes performance bonuses, holiday bonuses, commissions, referral bonuses, and more.
A few key points:
Bonuses are fully taxable, just like regular wages.
They are generally subject to:
Federal income tax withholding
Social Security and Medicare
State and local taxes, where applicable
The big confusion comes from how income tax is withheld on bonus payments, not from some secret, higher “bonus tax bracket.”
Two main federal withholding methods
Most U.S. employers use one of two approaches for federal income tax withholding on bonuses:
Percentage (flat) method
If a bonus is paid separately and clearly identified as a bonus, federal income tax can be withheld at a flat 22% on total supplemental wages up to $1 million in a calendar year.
If an employee’s bonuses exceed $1 million in a year, the first $1 million is withheld at 22%, and every dollar above that must be withheld at 37%.
Aggregate (combined) method
The employer combines the bonus with the employee’s regular wages for that pay period and calculates withholding as if the entire amount were a single regular paycheck.
The withholding is based on the employee’s W 4 and marginal tax rate, which can make the bonus check look like it is being taxed more or less heavily than 22%.
At tax filing time, all wages and bonuses are added together and taxed under the same annual brackets. If too much was withheld, the employee gets it back as part of a refund. If too little was withheld, they may owe more. The “my bonus got taxed to death” feeling is usually a withholding issue, not a special punishment tax.
How Rollfi makes bonus season easier
Rollfi treats bonuses as a first class part of payroll, not a messy edge case.
With Rollfi, employers can:
Add bonuses as distinct pay items (performance, holiday, spot, referral, and so on) rather than burying them in regular earnings.
Automatically apply appropriate supplemental wage withholding logic for federal income tax, and incorporate state and local rules where required.
Schedule bonuses to run on a specific end-of-year payroll or include them in regular cycles, while keeping everything synced to accounting and reporting.
Give employees clear paystubs that distinguish base pay from bonus amounts, plus all related withholdings.
That transparency alone reduces confusion and tickets to HR or finance about “where my bonus went” because employees can literally see the gross amount, tax withheld, and net amount on a single, clean paystub.
Things to remember: Employer checklist
If you are an employer planning bonuses, here is a quick checklist to keep bonus season smooth, fair, and compliant:
Define the purpose of each bonus: Decide whether each bonus is performance based, profit sharing, retention, or holiday recognition. Label it clearly for employees and accounting.
Document your criteria: Write down how bonuses are calculated (for example, percentage of salary, profit pool formula, KPI achievement) and keep that consistent across the organization.
Choose your withholding approach: Decide whether you will generally use the flat supplemental rate or aggregate method and configure your process to match.
Communicate timing and expectations: Let employees know when the bonus will run, whether it is appearing on a separate check or combined with a normal paycheck, and that taxes and other deductions will reduce the headline number.
Tie into your reporting and budgeting: Track bonus categories, review their impact on labor costs, and make sure your year end and next year’s budgets reflect your actual bonus practices.
Things to remember: Employee checklist
For employees seeing a bonus hit their account, this quick mental checklist can help:
Read the paystub line by line: Confirm that the bonus is listed as its own line, you can see the gross bonus amount, and you understand how much tax and other deductions were taken out.
Expect higher visible withholding on the check: Because of supplemental wage rules or the aggregate method, the bonus paycheck might look like it is taxed more aggressively, even though your final annual tax is determined at filing.
Ask how bonuses are calculated: Understanding the formula and criteria helps you align your goals with how your company rewards performance.
Make a plan for the money: Decide ahead of time whether you are using the bonus for savings, debt payoff, investments, or specific purchases so it does not disappear into everyday spending.
Take the win: Whether it is a modest spot bonus or a big year end payout, a bonus is a concrete acknowledgment of your contributions over the year.
End-of-year bonuses do not have to mean end-of-year chaos. With clear policies, transparent communication, and solid payroll processes, employers can reward their teams in a way that feels fair and understandable, and employees can see exactly what they earned and why, with no mystery and no guesswork.
About Rollfi
Rollfi empowers banks, vertical SaaS platforms, accounting firms, and fintechs to add payroll and benefits to their offerings through white-label solutions and robust APIs. With Rollfi’s infrastructure, platforms can unlock new revenue, boost customer retention, and gain valuable payroll data insights. Fast deployment and full regulatory coverage make Rollfi the easiest way to turn your platform into a one-stop shop for essential business services.