Are Bonuses Part of No Tax on Overtime? How Bonuses Are Actually Taxed

Two beliefs about bonuses circulate every December, and both are wrong. The first, newer one is that the 2026 "no tax on overtime" rules made bonuses tax-free, since a bonus is extra pay just like overtime. The second, older one is the opposite: that bonuses are taxed at a special, punishing rate, because the check that arrives is so much smaller than the number that was announced. The truth sits between them. Bonuses get no new deduction, and they never had a special tax rate; what they have is a distinctive withholding rule that makes the paycheck look worse than the tax outcome actually is. This article untangles the whole picture, then covers the two real ways a bonus interacts with the new deductions.

No, bonuses are not covered by the new deductions

The 2025 through 2028 deductions created by the One Big Beautiful Bill Act are narrow by design. The overtime deduction reaches only the premium portion of overtime that federal law, FLSA section 7, requires, as explained in what counts as qualified overtime. A bonus is not required by the FLSA at all, so it fails that test at the first step. The tips deduction reaches only voluntary payments from customers to workers in listed occupations, and a bonus comes from your employer, not a customer. There is no third deduction for bonuses anywhere in the law. A year-end bonus, a signing bonus, a production incentive, a commission: all of it remains fully taxable wage income, exactly as before.

The 22 percent everyone notices is withholding, not tax

The reason bonuses feel specially taxed is a payroll rule, not a tax rate. The IRS classifies bonuses, along with commissions, severance, awards, and similar payments, as supplemental wages, and Publication 15, the employer's tax guide for 2026 on IRS.gov, gives employers two ways to withhold on them. Under the optional flat-rate method, the employer withholds a flat 22 percent of the bonus, no questions asked. Under the aggregate method, the bonus is lumped with a regular paycheck and withheld as if that combined amount were your normal pay, which often briefly treats you as a much higher earner and takes out even more. For supplemental wages above $1 million to one employee in a year, a mandatory 37 percent rate applies to the excess.

Withholding washes out at filing

Here is the part that dissolves the "bonus tax" myth: withholding is a deposit, not a verdict. When you file, the bonus is just ordinary income taxed at your regular brackets, and everything withheld during the year is credited against your actual tax. If the flat 22 percent took out more than your real rate on those dollars, the difference comes back as a refund; if you are a high earner and 22 percent was too little, you make up the gap. Add Social Security, Medicare, and any state withholding to the federal amount and it is easy for 35 or 40 percent of a bonus to vanish from the check, but none of that changes what the bonus ultimately costs you in tax. If a large bonus is part of your year, it is one more reason for the mid-year checkup described in withholding and estimated taxes.

Interaction one: a bonus can enlarge your overtime deduction

There is one way a bonus genuinely touches the overtime deduction, and it is favorable. The FLSA computes overtime on your "regular rate," which includes more than base hourly pay: nondiscretionary bonuses, such as promised production or attendance bonuses, must be folded in. A higher regular rate means a higher required overtime premium, and the premium is exactly what the deduction covers. Worked example: an employee earns $20 an hour and works 50 hours in a week, earning a $200 promised production bonus. Straight-time pay is $1,000, plus the $200 bonus, makes $1,200 for 50 hours, so the regular rate is $24, not $20. The FLSA half-time premium on the 10 overtime hours is half of $24 times 10, or $120, rather than the $100 it would be without the bonus. The bonus itself stays taxable, but it quietly raised the deductible premium by $20 that week.

Interaction two: a bonus can shrink every one of the deductions

The unfavorable interaction runs through income. All four new deductions phase out as modified adjusted gross income rises, and a bonus is MAGI like any other wage. The overtime and tips deductions lose $100 of cap for every $1,000 of MAGI above $150,000 (single) or $300,000 (joint); the car loan deduction falls twice as fast above $100,000 or $200,000; the senior deduction erodes at 6 percent of MAGI above $75,000 or $150,000. A $10,000 bonus landing on a single filer already at the $150,000 line costs $1,000 of overtime-deduction cap at the same moment it delivers the extra income. That is never a reason to refuse a bonus, since a phaseout only trims a tax break rather than exceeding the new income, but it is a reason to re-estimate. The full arithmetic lives in income phaseouts and MAGI, and the calculators on the hub home page can re-run your numbers with the bonus included.

General information, not tax advice

This article is general information about how bonuses are withheld and taxed and how they relate to the 2025 through 2028 deductions; it is not tax advice. Supplemental wage withholding rules are set out in IRS Publication 15 for the year in question, FLSA regular-rate rules are administered by the Department of Labor, and any of these rules can change. Confirm current figures at IRS.gov and consult a qualified tax professional about your own situation.