How Bonuses, RSUs & Severance Pay Are Taxed

Federal Supplemental Tax Rate and RSU Withholding in 2026

For 2026, the federal supplemental-wage income tax withholding rate is 22% when the optional flat-rate method applies to separately identified supplemental pay up to $1 million. The portion above $1 million in annual supplemental wages is subject to mandatory 37% withholding. Employers may instead use the aggregate method in qualifying cases; the withholding is not necessarily the final tax owed. Bonuses and severance are supplemental wages; RSU compensation can also be subject to these rules. See IRS Publication 15, section 7. Estimate a vesting event with the RSU tax calculator, or a bonus with the bonus tax calculator.

How Do I Tax Supplemental Wages?

When supplemental wages are identified separately and income tax was withheld from regular wages in the current or preceding calendar year, the employer can use the 22% flat rate or the aggregate method on amounts up to $1 million. Under the aggregate method, the employer combines the payment with regular wages to calculate withholding, then subtracts withholding on regular wages. If supplemental pay is combined with regular wages without identifying each amount, withholding is calculated on the total as regular wages. See IRS Publication 15 for the conditions and rules.

What Was the Supplemental Tax Rate in 2023?

For 2023, the optional federal flat withholding rate was also 22% for qualifying separately identified supplemental wages up to $1 million; the amount above $1 million was subject to 37% withholding. See IRS Publication 15 for 2023, section 7.

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

When RSU shares are delivered at vesting, their value is generally wage income. The federal supplemental wage rules may apply, including the optional flat rate or aggregate method described above. Plan terms and any qualifying deferral election can affect timing; see IRS Publication 525.

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 federal supplemental-wage withholding rules apply, alongside applicable state withholding and payroll taxes. 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.