How Bonuses, RSUs & Severance Pay Are Taxed

What Counts as a "Supplemental Wage" — and Why It Matters

The IRS groups bonuses, commissions, RSU vesting income, severance pay, and back pay into a single category called supplemental wages, and requires employers to withhold from them differently than regular salary or hourly pay (IRS Publication 15, Circular E, Section 7). This is the entire reason a bonus check or a batch of vested RSU shares seems to get hit with an unusually large withholding — it isn't your normal paycheck's graduated withholding tables at work, it's a completely separate flat-rate system.

This single rule explains three calculators on this site that people often assume are unrelated: bonus tax by state, RSU vesting tax by state, and severance pay tax by state all use the exact same federal supplemental-wage withholding mechanics underneath — only the state layer and a few plan-specific details (like RSU "sell-to-cover" shares) differ.

The Federal Flat Rate: 22% (or 37% Above $1 Million)

Under the percentage method for supplemental wages, employers must withhold a flat 22% federal rate on supplemental pay up to $1,000,000 in cumulative supplemental wages for the calendar year, and 37% on any amount above that threshold (IRS Publication 15, 2026 revision). This applies regardless of your actual marginal tax bracket — a 12%-bracket taxpayer and a 32%-bracket taxpayer both get 22% withheld from an ordinary bonus, at least up to the $1 million mark.

Social Security (6.2%, up to the $184,500 2026 wage base) and Medicare (1.45%, plus an extra 0.9% Additional Medicare Tax once your year-to-date wages cross $200,000) still apply in full to supplemental wages — there's no separate FICA treatment, only the income-tax withholding method changes.

Why Bonus Withholding Isn't Your Actual Tax Bill

This is the single most common point of confusion: the 22% flat rate is a withholding rate, not necessarily your real tax rate on that income. Your bonus, RSU vesting income, or severance pay is simply added to your total income for the year on your tax return, taxed at your normal marginal brackets alongside your regular salary — the flat 22% withheld from the check is reconciled at filing time just like any other withholding.

If your effective tax rate on that income ends up below 22% (common for many middle-income earners once the bonus is blended with the rest of a graduated bracket system), you'll get some of that withholding back as part of your refund. If your total income pushes you well into the 32%+ brackets, you may owe additional tax when you file, because 22% wasn't enough. Either way, the flat rate on your pay stub is not the final word on what you actually owe.

State Supplemental Withholding Varies Enormously

On top of the federal 22%/37% rate, most states with an income tax also set their own supplemental wage rate — and it varies far more than most people expect. California withholds a flat 10.23% on bonuses and stock options (EDD Publication DE 44), while New York withholds 11.7% at the state level alone, with New York City residents facing an *additional* 4.25% local supplemental rate on top of that (NYS Department of Taxation and Finance).

About 20 states don't publish a separate supplemental rate at all — employers there must use the "regular" aggregate withholding method instead, which this site's calculators approximate using the state's existing flat rate (for flat-tax states) or top marginal bracket (for progressive-bracket states), clearly labeled as an estimate rather than an exact published rate. And nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so 0% is withheld at the state level regardless of income type. See your exact state's rate on the Bonus Tax Calculator, RSU Vesting Tax Calculator, or Severance Pay Tax Calculator hubs.

RSU Vesting: The Same Withholding, Plus "Sell-to-Cover" Shares

Restricted stock units (RSUs) are taxed as ordinary W-2 wages at their fair market value on the vesting date — not when they were granted, and not when you eventually sell them (IRS Publication 525, "Restricted Property"; IRS Tax Topic 427). That vested value is a supplemental wage, subject to the identical 22%/37% federal rate and your state's supplemental rate.

Because the "paycheck" here is shares of stock rather than cash, most employer plans handle the withholding through sell-to-cover: the plan automatically sells enough of your newly vested shares to cover the estimated tax withholding, and deposits the remaining shares into your account. Run your specific vest — share count and stock price on the vesting date — through the RSU Vesting Tax Calculator to see exactly how many shares get sold to cover taxes versus how many you actually keep.

Severance Pay: Same Rate, No 401(k) Deferral

Severance pay is explicitly listed alongside bonuses and commissions as a supplemental wage in IRS Publication 15, so it gets the identical 22%/37% federal flat-rate treatment, plus your state's supplemental rate, plus full FICA. One meaningful difference from a bonus: most employer 401(k) plan documents only treat pay for services performed *while actively employed* as eligible compensation for retirement plan deferral purposes — since severance is generally paid after employment ends, it typically cannot be deferred into a 401(k) the way an active bonus can be. Estimate your take-home severance with the Severance Pay Tax Calculator.