Do FICA Wages Include Bonuses? (w/Examples) + FAQs

Yes. FICA wages include bonuses. The federal law governing Social Security and Medicare taxes treats bonuses as regular compensation subject to the same FICA tax rates that apply to your salary.

Section 3121(a) of the Internal Revenue Code creates a broad definition of wages for FICA purposes. This section defines wages as “all remuneration for employment” unless specifically excluded by another provision. The IRS regulation at 31.3121(a)-1(c) states directly that “the name by which the remuneration for employment is designated is immaterial” and explicitly confirms that “salaries, fees, and bonuses are wages, if paid as compensation for employment”. This requirement means employers must withhold both the employee and employer share of FICA taxes on all bonus payments, or they face penalties ranging from fines equal to a percentage of misclassified wages to criminal prosecution for willful violations.

According to the Social Security Administration, approximately 94% of U.S. workers pay into the FICA system through payroll taxes, which includes taxes withheld from bonuses. In 2024, the average worker paid $10,918.20 in Social Security taxes alone when earning up to the wage base limit.

What you will learn from this article:

📊 Why federal law requires FICA taxes on every type of bonus — including cash bonuses, signing bonuses, retention bonuses, performance bonuses, and year-end bonuses, with the specific IRC sections and Treasury regulations that mandate this treatment

💰 How much FICA tax comes out of your bonus — the exact rates (6.2% for Social Security and 1.45% for Medicare), wage base limits for 2026 ($184,500), and additional Medicare tax for high earners

🧮 How to calculate your take-home bonus amount — using real-world examples showing both withholding methods employers use (the 22% flat rate percentage method and the aggregate method)

⚠️ Common mistakes that cost employers thousands — including failing to withhold FICA on gift cards, misreporting bonuses on 1099 forms instead of W-2s, and incorrectly treating certain payments as reimbursements

🎯 Special situations with RSUs, stock options, deferred compensation, and severance — covering the unique FICA timing rules that apply when bonuses vest years before payment and the Supreme Court decision that resolved the severance pay dispute

Understanding FICA: The Federal Insurance Contributions Act

FICA stands for the Federal Insurance Contributions Act, a federal law passed in 1935 that requires employers and employees to fund Social Security and Medicare programs. The law creates a mandatory payroll tax system where both parties contribute equally. These taxes provide retirement income, disability benefits, survivor benefits through Social Security, and healthcare coverage through Medicare for elderly and disabled Americans.

The Federal Insurance Contributions Act imposes taxes under Internal Revenue Code Sections 3101 (employee share) and 3111 (employer share). Section 3121(a) defines “wages” as the foundation for calculating these taxes. Because Congress wrote the statute using broad language, courts consistently rule that wages include virtually all forms of compensation unless a specific statutory exception applies.

FICA Tax Components and Rates for 2026

FICA consists of two separate taxes that combine to create the total FICA rate.

The Social Security tax (officially called Old-Age, Survivors, and Disability Insurance or OASDI) applies at a rate of 6.2% for employees and 6.2% for employers. This creates a combined rate of 12.4% on wages. The Social Security tax applies only to wages up to the annual wage base limit, which is $184,500 in 2026. Once an employee earns more than this amount in a calendar year, neither the employee nor employer pays additional Social Security tax on the excess wages.

The Medicare tax (officially called Hospital Insurance or HI) applies at a rate of 1.45% for employees and 1.45% for employers. This creates a combined rate of 2.9% on wages. Unlike Social Security tax, Medicare tax has no wage base limit. Every dollar of wages, no matter how high, remains subject to Medicare tax.

High earners face an Additional Medicare Tax of 0.9% on wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly. This additional tax applies only to the employee — the employer does not match it. Employers must begin withholding the Additional Medicare Tax when an employee’s wages exceed $200,000 in a calendar year, regardless of the employee’s filing status.

What Wages Mean Under Federal Law

Section 31.3121(a)-1(b) of the Treasury regulations provides that “the term ‘wages’ means all remuneration for employment unless specifically excepted”. Section 31.3121(a)-1(d) adds that “generally the basis upon which the remuneration is paid is immaterial in determining whether the remuneration is wages”. This regulatory language creates an expansive definition that captures bonuses, commissions, tips, overtime pay, severance payments, and other forms of compensation.

The IRS issued Revenue Ruling 04-109, which confirms that “salaries, fees, and bonuses are wages, if paid as compensation for employment”. This ruling resolved any lingering questions about whether bonuses constitute wages. The ruling states that “the name by which the remuneration for employment is designated is immaterial”. Whether an employer calls a payment a “bonus,” “incentive pay,” “performance award,” or any other name makes no difference for FICA tax purposes.

Payment Type	FICA Status	Authority
Cash bonuses	Taxable	26 USC 3121(a); IRS Rev. Rul. 04-109
Signing bonuses	Taxable	26 USC 3121(a); IRS Rev. Rul. 04-109
Performance bonuses	Taxable	26 USC 3121(a)
Retention bonuses	Taxable	26 USC 3121(a)
Year-end bonuses	Taxable	26 USC 3121(a); Treas. Reg. 31.3121(a)-1
Commission payments	Taxable	26 USC 3121(a)
Holiday bonuses (cash)	Taxable	IRS Pub. 15-B

Types of Bonuses Subject to FICA Taxes

Cash Bonuses

All cash bonuses constitute wages subject to FICA taxes. A cash bonus includes any payment made in U.S. currency, whether paid by check, direct deposit, or cash. The timing of the payment makes no difference — a bonus paid weekly, monthly, quarterly, or annually remains subject to FICA taxes.

Employers must withhold the 6.2% Social Security tax and 1.45% Medicare tax from the employee’s cash bonus payment. The employer must also pay a matching 6.2% Social Security tax and 1.45% Medicare tax on the bonus amount. Both withholding and payment must occur in the same quarter the bonus is paid, and employers report these amounts on Form 941 (Employer’s Quarterly Federal Tax Return).

Example: Maria works as a sales manager and receives a $10,000 year-end bonus in December 2026. Her employer must withhold $620 for Social Security tax (6.2% × $10,000) and $145 for Medicare tax (1.45% × $10,000). The employer must also pay a matching $620 for Social Security and $145 for Medicare. Maria’s total FICA withholding equals $765, and the employer’s matching contribution equals $765, for a combined FICA tax of $1,530.

Signing Bonuses

A signing bonus is a payment made to an employee as an inducement to join a company or accept employment. IRS Revenue Ruling 04-109 specifically addresses signing bonuses and concludes that “amounts an employer pays as bonuses for signing or ratifying a contract in connection with the establishment of the employer-employee relationship are wages for purposes of FICA”.

The IRS reasoning is straightforward: the signing bonus compensates the employee for agreeing to perform services, which makes it remuneration for employment. The fact that the payment occurs before the employee begins working does not change the result. As long as the payment relates to the employment relationship, it constitutes wages.

Bonus Timing	Employee Gross Bonus	Social Security Tax (6.2%)	Medicare Tax (1.45%)	Federal Income Tax (22% flat)	Total Withholding	Net Bonus
$20,000 signing bonus paid before start date	$20,000	$1,240	$290	$4,400	$5,930	$14,070
$5,000 referral bonus paid 90 days after referral hire	$5,000	$310	$72.50	$1,100	$1,482.50	$3,517.50
$50,000 retention bonus paid at end of 2-year period	$50,000	$3,100	$725	$11,000	$14,825	$35,175

Performance Bonuses and Merit-Based Awards

Performance bonuses reward employees for achieving specific goals, exceeding sales targets, or demonstrating superior job performance. These payments constitute wages subject to FICA taxes because they represent compensation for services performed.

The bonus structure makes no difference in the FICA analysis. Whether the employer pays the bonus based on individual performance, team performance, company-wide performance, or any combination of factors, the payment remains taxable wages. The frequency of payment also makes no difference — monthly, quarterly, or annual performance bonuses all constitute wages.

Example: James works as a software developer. His employment contract provides for quarterly performance bonuses of up to 10% of his base salary if he completes projects on time and within budget. In Q1 2026, James earns his full bonus of $7,500. The employer withholds Social Security tax of $465 (6.2% × $7,500), Medicare tax of $108.75 (1.45% × $7,500), and federal income tax using either the percentage method or aggregate method. The payment appears on James’s W-2 in Box 1 (wages), Box 3 (Social Security wages), and Box 5 (Medicare wages).

Retention Bonuses

A retention bonus is a payment designed to keep a valued employee from leaving the company. These bonuses often require the employee to remain employed for a specified period, such as one or two years, or the employee must repay the bonus.

Retention bonuses constitute wages subject to FICA taxes when paid. If the bonus is paid in installments, each installment is subject to FICA taxes when paid. If the bonus is paid as a lump sum after the retention period ends, FICA taxes apply to the entire amount at that time.

Important timing rule: If an employee receives a retention bonus and then leaves before the retention period ends, requiring repayment, the employer may request a FICA tax refund from the IRS by filing Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return). The refund process requires employee consent for the employee’s share of FICA taxes.

Commission Payments

Commissions are payments based on a percentage of sales made or a fixed amount per sale. The Internal Revenue Code treats commissions identically to bonuses for FICA purposes — both constitute wages subject to the full FICA tax rate.

The IRS classifies commissions as “supplemental wages” for federal income tax withholding purposes. This classification affects how employers calculate federal income tax withholding (using either the 22% flat rate or the aggregate method), but it does not change the FICA tax treatment. Commissions remain subject to the standard 6.2% Social Security tax and 1.45% Medicare tax.

Example: Sarah works as a real estate agent and earns a $15,000 commission from a home sale in March 2026. Her brokerage withholds $930 for Social Security tax (6.2% × $15,000) and $217.50 for Medicare tax (1.45% × $15,000). The brokerage also pays a matching $930 for Social Security and $217.50 for Medicare. Sarah’s net commission, before federal and state income taxes, equals $13,852.50.

Year-End and Holiday Bonuses

Year-end bonuses and holiday bonuses paid in cash constitute wages subject to FICA taxes. Many employers pay these bonuses in December as a reward for the year’s work or as a holiday gift. The employer’s intent to provide a “gift” makes no difference — the IRS treats all cash payments from employer to employee as compensation for services.

The IRS rule is simple: “all cash or gift cards redeemable for cash are taxable to the employee, even when given as a holiday gift”. This rule applies regardless of the amount. A $50 cash bonus and a $50,000 cash bonus both constitute taxable wages subject to FICA taxes.

Example: An employer gives each employee a $500 holiday bonus in December 2026. The employer must withhold Social Security tax of $31 (6.2% × $500), Medicare tax of $7.25 (1.45% × $500), and federal income tax (using either the percentage or aggregate method). The employer must also pay matching Social Security tax of $31 and matching Medicare tax of $7.25. The employer reports these amounts on the employee’s W-2 and on the employer’s Form 941 for the fourth quarter of 2026.

Gift Cards, Non-Cash Bonuses, and De Minimis Benefits

Gift Cards Are Always Taxable

Gift cards and gift certificates constitute “cash equivalent” fringe benefits that are always taxable, regardless of the amount. The IRS reasoning is straightforward: because the recipient can use a gift card to purchase items of their choice, the gift card functions like cash.

IRS Publication 15-B states explicitly that “cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit”. This rule means a $10 gift card to Starbucks is taxable, just like a $1,000 gift card to Amazon is taxable.

Employers must include the value of gift cards in the employee’s wages and withhold federal income tax, Social Security tax, and Medicare tax. The gift card value appears in Box 1 (wages), Box 3 (Social Security wages), and Box 5 (Medicare wages) of the employee’s Form W-2.

De Minimis Fringe Benefits Exception

A “de minimis” fringe benefit is any property or service provided to an employee that has such little value that accounting for it would be unreasonable or administratively impracticable. De minimis benefits are not subject to FICA taxes or federal income tax.

Treasury Regulation 1.132-6(e) provides examples of de minimis fringe benefits that qualify for the exclusion:

• Occasional snacks, coffee, or soft drinks
• Holiday gifts like a turkey or ham
• Flowers, fruit, books, or similar items provided under special circumstances
• Occasional theater or sporting event tickets
• Occasional meal money or transportation fare for employees working overtime

Critical limitation: The benefit must be occasional and infrequent to qualify. An employer who provides coffee every day to all employees can exclude the coffee as a de minimis benefit. But an employer who provides a $100 gift card every month cannot exclude these gift cards as de minimis because the benefit is neither occasional nor infrequent.

Non-Cash Prizes and Awards

Non-cash employee recognition awards and achievement awards may qualify for exclusion from FICA taxes if they meet specific requirements under Internal Revenue Code Section 74(c) and Section 274(j).

An employee achievement award qualifies for exclusion only if:

1. The award consists of tangible personal property (not cash, gift cards, vacations, meals, lodging, theater or sporting event tickets, securities, or similar items)
2. The award is given for length of service or safety achievement
3. The award is presented as part of a meaningful presentation
4. The award value does not exceed $400 for non-qualified plan awards or $1,600 for qualified plan awards

Awards that exceed these limits become fully taxable (the entire amount, not just the excess). Awards that fail to meet the requirements (such as cash awards or awards not given for length of service or safety achievement) are fully taxable as wages subject to FICA taxes.

Award Type	Tangible Property < $400	Tangible Property > $400	Cash or Gift Card (Any Amount)
Length of Service Award	Not taxable (de minimis)	Fully taxable as wages	Fully taxable as wages
Safety Achievement Award	Not taxable (de minimis)	Fully taxable as wages	Fully taxable as wages
Performance Award	Fully taxable as wages	Fully taxable as wages	Fully taxable as wages

How Employers Calculate and Withhold FICA Taxes on Bonuses

The Two Withholding Methods for Federal Income Tax

The IRS permits employers to use one of two methods for calculating federal income tax withholding on supplemental wages like bonuses: the percentage method or the aggregate method. The choice of method affects only federal income tax withholding, not FICA tax withholding. FICA taxes always use the same 6.2% Social Security rate and 1.45% Medicare rate, regardless of which method the employer selects for federal income tax.

Percentage Method (Flat 22% Rate)

The percentage method withholds federal income tax at a flat 22% rate on bonus payments up to $1 million in a calendar year. For supplemental wages exceeding $1 million in a calendar year, the employer must withhold federal income tax at 37% on the amount over $1 million.

The percentage method is simpler for employers because it requires no calculations based on the employee’s W-4 information or regular pay rate. The employer simply multiplies the bonus amount by 22% (or 37% for amounts over $1 million) to determine federal income tax withholding.

Example using percentage method:

David receives a $8,000 bonus paid separately from his regular paycheck in November 2026.

• Gross bonus: $8,000
• Social Security tax (6.2%): $496
• Medicare tax (1.45%): $116
• Federal income tax (22% flat): $1,760
• Total withholding: $2,372
• Net bonus: $5,628

David’s employer will also pay matching FICA taxes of $496 (Social Security) and $116 (Medicare), for a total employer cost of $612.

Aggregate Method

The aggregate method combines the bonus payment with the employee’s regular wages for the pay period and calculates federal income tax withholding as if the combined amount were a single payment of regular wages. The employer uses the employee’s W-4 information and applies the standard payroll withholding tables from IRS Publication 15-T.

The aggregate method often results in higher federal income tax withholding than the percentage method because the combined wages push the employee into a higher withholding bracket. This higher withholding is temporary — when the employee files their tax return, they will receive a refund if too much was withheld.

Example using aggregate method:

Lisa earns $4,000 per biweekly paycheck (gross). She receives a $6,000 bonus combined with her regular paycheck.

• Combined gross pay: $10,000 ($4,000 regular + $6,000 bonus)
• Social Security tax on $10,000 (6.2%): $620
• Medicare tax on $10,000 (1.45%): $145
• Federal income tax on $10,000: Calculated using W-4 information and IRS Publication 15-T tables
• State income tax: Varies by state

The federal income tax withholding will be calculated as if Lisa earns $10,000 every biweekly pay period (which would equal $260,000 per year), even though her actual annual salary is much lower. This typically results in higher withholding than if the bonus were paid separately using the percentage method.

FICA Tax Calculation Step-by-Step

Step 1: Determine the employee’s gross bonus amount.

Step 2: Check whether the employee has reached the Social Security wage base limit for the year. In 2026, the limit is $184,500. If the employee has already earned $184,500 or more in the calendar year, do not withhold Social Security tax on the bonus. If the employee has not reached the limit, withhold 6.2% for Social Security tax.

Step 3: Calculate Medicare tax at 1.45% on the entire bonus amount. Medicare tax has no wage limit.

Step 4: Check whether the employee’s wages (including the bonus) exceed $200,000 in the calendar year. If yes, withhold an additional 0.9% Medicare tax on wages above $200,000.

Step 5: Add the Social Security tax, Medicare tax, and Additional Medicare Tax (if applicable) to determine total FICA withholding.

Example with wage base limit:

Robert has earned $180,000 in wages through November 2026. In December, he receives a $20,000 bonus.

• Total wages including bonus: $200,000
• Amount subject to Social Security tax: $184,500 (the wage base limit)
• Robert has already paid Social Security tax on $180,000
• Social Security tax on bonus: 6.2% × $4,500 = $279
• The remaining $15,500 of the bonus ($20,000 – $4,500) is not subject to Social Security tax because it exceeds the wage base
• Medicare tax on bonus: 1.45% × $20,000 = $290
• Additional Medicare Tax: 0.9% × $0 = $0 (Robert’s total wages of $200,000 do not exceed the $200,000 threshold)
• Total FICA withholding: $279 + $290 = $569

Employer Reporting Requirements

Employers must report bonus payments on three key forms: Form 941, Form W-2, and potentially Form 941-X if corrections are needed.

Form 941 (Employer’s Quarterly Federal Tax Return): Employers file Form 941 each quarter to report wages paid, federal income tax withheld, and both the employer and employee share of Social Security and Medicare taxes. Bonuses paid during the quarter appear on Line 2 (Wages, tips, and other compensation), Line 5a (Taxable social security wages), and Line 5c (Taxable Medicare wages & tips).

Form W-2 (Wage and Tax Statement): Employers issue Form W-2 to each employee by January 31 of the following year. Bonuses appear in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips). The employee uses the W-2 to prepare their federal income tax return.

Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return): If an employer discovers an error in FICA tax withholding or reporting on a previously filed Form 941, the employer must file Form 941-X to correct the error. Common situations requiring Form 941-X include bonus clawbacks, incorrectly classified payments, or mathematical errors in calculating withholding.

Common Mistakes Employers Make with Bonuses and FICA Taxes

Mistake #1: Treating Gift Cards as Non-Taxable Gifts

Many employers incorrectly believe that small gift cards qualify as de minimis fringe benefits and fail to withhold FICA taxes. This mistake costs employers when the IRS audits payroll records and assesses penalties for failure to withhold and remit FICA taxes.

The IRS rule is clear: “cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit”. A $25 gift card to Target is taxable. A $10 gift card to Starbucks is taxable. Even a $5 gift card to a local restaurant is taxable.

Consequence: The employer owes back FICA taxes on the unreported gift cards, plus penalties for failure to withhold, plus interest. The IRS may also require the employer to issue corrected W-2c forms to affected employees.

Mistake #2: Reporting Bonuses on Form 1099 Instead of Form W-2

Some employers attempt to avoid FICA taxes by issuing Form 1099-MISC or Form 1099-NEC to report bonus payments instead of including the bonuses on the employee’s Form W-2. This practice is illegal when the recipient is an employee rather than an independent contractor.

The IRS uses Form 1099 to report payments to independent contractors, not employees. When an employer issues a 1099 for an employee bonus, the employer illegally shifts the employer’s share of FICA taxes to the employee. The employee ends up paying both halves of FICA (15.3% instead of 7.65%), while the employer saves its 7.65% matching obligation.

Consequence: An employee who receives a 1099 for a bonus should file Form 8919 (Uncollected Social Security and Medicare Tax on Wages) with their tax return. This form calculates the employee’s share of FICA taxes (7.65%) and alerts the IRS that the employer failed to withhold and remit FICA taxes. The IRS will then investigate the employer and assess penalties for the unpaid employer share of FICA taxes, plus interest.

Mistake #3: Failing to Withhold FICA on Deferred Compensation at Vesting

Employers often make timing errors with nonqualified deferred compensation plans. The general rule for FICA taxes is that wages are taxable when paid. However, nonqualified deferred compensation is subject to a “special timing rule” that accelerates FICA taxation.

Under Treasury Regulation 31.3121(v)(2)-1, amounts deferred under a nonqualified deferred compensation plan must be taken into account for FICA tax purposes at the later of: (1) when the services creating the right to the compensation are performed, or (2) when the compensation is no longer subject to a substantial risk of forfeiture (i.e., when it vests).

Example: An executive participates in a nonqualified deferred compensation plan that provides for a $100,000 bonus to vest after three years of service, payable at retirement. The executive completes three years of service in 2026, causing the $100,000 to vest. Under the special timing rule, the employer must withhold and pay FICA taxes on the $100,000 in 2026, even though the executive will not receive the payment until retirement (potentially many years later).

Consequence: Employers who fail to apply the special timing rule must withhold FICA taxes when the deferred compensation is eventually paid. At that point, the employee may owe FICA taxes on both the original deferral and any investment earnings credited to the account, significantly increasing the FICA tax burden. Additionally, the employer may owe penalties for late payment of FICA taxes.

Mistake #4: Misclassifying Bonuses as Expense Reimbursements

Some employers attempt to avoid FICA taxes by characterizing bonus payments as “expense reimbursements” rather than compensation. This misclassification violates federal tax law when the payment is actually remuneration for services performed.

Expense reimbursements are payments that reimburse an employee for business expenses incurred on behalf of the employer, such as mileage, meals during business travel, or office supplies purchased by the employee. These reimbursements are not subject to FICA taxes only if they are paid under an “accountable plan” that requires the employee to substantiate the expenses and return any excess reimbursement.

A bonus paid as additional compensation for strong performance is not an expense reimbursement, even if the employer labels it as such. The IRS will reclassify the payment as wages subject to FICA taxes.

Consequence: When the IRS discovers the misclassification (typically during an audit), the employer must pay back FICA taxes, penalties, and interest. The employer must also issue corrected W-2 forms showing the additional wages.

Mistake #5: Failing to Withhold FICA on Stock Options and RSUs

Employers sometimes fail to withhold FICA taxes when restricted stock units (RSUs) vest or when employees exercise nonqualified stock options. Both types of equity compensation trigger FICA tax obligations at specific times.

Nonqualified stock options (NSOs): FICA taxes are due when the employee exercises the option. The taxable amount equals the difference between the option exercise price and the fair market value of the stock on the exercise date (the “spread”).

Restricted stock units (RSUs): FICA taxes are due when the RSU vests, meaning when the employee’s right to receive the shares is no longer subject to a substantial risk of forfeiture. The taxable amount equals the fair market value of the shares on the vesting date. If the RSU is structured with deferred settlement (shares are delivered after vesting), FICA taxes are still due at vesting, not at the later settlement date.

Example: An employee receives 100 RSUs that vest on January 15, 2026, when the company’s stock trades at $150 per share. The employer must withhold FICA taxes on $15,000 (100 shares × $150) on January 15, 2026. The employer typically withholds shares (a “net settlement”) to cover the FICA taxes, so the employee receives fewer than 100 shares.

Consequence: Employers who fail to withhold FICA taxes on equity compensation face penalties, interest, and potential disputes with employees over who owes the unpaid taxes.

Severance Pay and FICA Taxes

Supreme Court Rules Severance Pay is Subject to FICA

In 2014, the United States Supreme Court decided United States v. Quality Stores, Inc., 572 U.S. 1032, holding that severance payments are wages subject to FICA taxes. This decision resolved a long-standing dispute among lower courts about whether severance pay constituted “wages” under the Federal Insurance Contributions Act.

The Supreme Court reasoned that severance payments are made “on account of” the employee’s employment relationship, making them remuneration for employment. The fact that severance is paid after employment ends does not change this analysis because the payment compensates the employee for services performed during employment.

Prior to the Supreme Court’s decision, the Sixth Circuit Court of Appeals had ruled in In re Quality Stores, Inc. that severance payments were not subject to FICA taxes because they compensated for lost future earnings rather than past services. The Supreme Court rejected this reasoning and held that severance payments are wages.

Consequence for employers: All severance payments are subject to the 6.2% Social Security tax (up to the wage base limit) and the 1.45% Medicare tax (with no limit), plus the Additional Medicare Tax if applicable. Employers must withhold these taxes from severance payments and pay the employer’s matching share.

Tax Withholding on Severance Payments

The IRS treats severance payments as “supplemental wages” for federal income tax withholding purposes. This classification means employers must withhold federal income tax at the flat 22% rate (or 37% for severance exceeding $1 million) in addition to FICA taxes.

Example: An employee receives $50,000 in severance pay after a layoff in 2026.

• Gross severance: $50,000
• Social Security tax (6.2%): $3,100
• Medicare tax (1.45%): $725
• Federal income tax (22% flat): $11,000
• State income tax: Varies by state
• Total federal withholding: $14,825
• Net severance (before state tax): $35,175

The employer also pays matching FICA taxes of $3,100 (Social Security) and $725 (Medicare), for a total employer cost of $3,825.

Gross-Up Calculations for Severance Pay

Some employers provide “grossed-up” severance payments that cover the employee’s tax burden, allowing the employee to receive a specific net amount. The gross-up calculation adds an additional amount to the severance payment to offset the taxes due.

Formula: Divide the desired net severance amount by (1 – combined tax rate).

Example: An employer wants an employee to receive $40,000 net after all taxes. The combined federal tax rate is 35% (22% federal income tax + 6.2% Social Security + 1.45% Medicare + 5.35% state income tax).

• Desired net amount: $40,000
• Combined tax rate: 35%
• Gross-up amount: $40,000 ÷ (1 – 0.35) = $40,000 ÷ 0.65 = $61,538
• Total taxes withheld: $61,538 × 0.35 = $21,538
• Net to employee: $61,538 – $21,538 = $40,000

State and Local Tax Considerations

FICA is a Federal Tax with No State Variations

FICA taxes are exclusively federal taxes imposed by the Internal Revenue Code. States do not impose their own versions of FICA taxes, nor can states modify the federal FICA tax rates or wage base limits. This means the 6.2% Social Security tax rate and the 1.45% Medicare tax rate apply uniformly across all 50 states.

The $184,500 Social Security wage base for 2026 also applies uniformly nationwide. An employee working in California faces the same wage base limit as an employee working in Texas or New York.

State Income Taxes on Bonuses

While FICA taxes are uniform, state income tax treatment of bonuses varies significantly by state. Nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) impose no state income tax on wages or bonuses. The remaining 41 states and the District of Columbia impose income taxes on bonus payments, but the tax rates and withholding rules differ.

Some states require employers to withhold state income tax from bonuses at a flat supplemental wage rate, similar to the federal 22% rate. Other states require employers to use the employee’s regular withholding rate or apply special calculation methods. Employers must consult their state’s tax agency regulations to determine the correct withholding method.

Example – California: California requires employers to withhold state income tax from bonus payments using either: (1) a flat 10.23% supplemental rate, or (2) the aggregate method combining the bonus with regular wages.

Example – Texas: Texas imposes no state income tax, so bonuses are subject only to federal income tax and FICA taxes.

Example – New York: New York requires employers to withhold state income tax from bonuses using the employee’s regular withholding rate based on their state withholding certificate (Form IT-2104).

State Disability Insurance and Other Payroll Taxes

Several states impose additional payroll taxes beyond federal FICA taxes. These state taxes apply to bonuses just as they apply to regular wages.

California State Disability Insurance (SDI): California imposes an SDI tax on employees to fund state disability and paid family leave benefits. For 2026, the SDI withholding rate is 1.3% on wages up to the SDI wage limit. Employers must withhold SDI tax from bonus payments.

New York Disability Benefits Law (DBL): New York requires employers to withhold a disability benefits contribution from employee wages to fund state disability benefits. The 2026 rate and wage base vary depending on the disability insurance carrier.

Hawaii Temporary Disability Insurance (TDI): Hawaii requires employers to provide temporary disability insurance to employees, funded by employee contributions. Employers withhold TDI contributions from employee wages, including bonuses.

Frequently Asked Questions (FAQs)

Are Christmas bonuses subject to FICA taxes?

Yes. Christmas bonuses paid in cash are wages subject to the 6.2% Social Security tax and 1.45% Medicare tax. The employer must withhold these taxes from the bonus and pay a matching employer share.

Do I pay FICA taxes on a signing bonus?

Yes. Signing bonuses constitute wages for FICA purposes, and employers must withhold the 6.2% Social Security tax and 1.45% Medicare tax from the payment. Revenue Ruling 04-109 specifically confirms this treatment.

Are bonuses subject to the Social Security wage base limit?

Yes. The $184,500 Social Security wage base for 2026 applies to all wages, including bonuses. Once an employee’s total wages exceed $184,500, neither the employee nor employer pays additional Social Security tax.

Can I avoid FICA taxes by paying a bonus with a 1099?

No. Employers cannot avoid FICA taxes by issuing Form 1099 to report employee bonuses. The IRS will reclassify the payment as wages and assess penalties for unpaid FICA taxes.

Are performance bonuses subject to FICA taxes?

Yes. Performance bonuses, merit bonuses, and all other bonuses based on job performance constitute wages subject to FICA taxes at the standard rates.

Do gift cards count as FICA wages?

Yes. Gift cards and gift certificates are cash equivalents that are always taxable as wages, regardless of the amount. Employers must withhold FICA taxes on gift cards.

Are referral bonuses subject to FICA taxes?

Yes. Referral bonuses paid to employees for recruiting new hires constitute wages subject to FICA taxes. The employer must withhold Social Security and Medicare taxes from the referral bonus.

Is severance pay subject to FICA taxes?

Yes. The Supreme Court ruled in United States v. Quality Stores, Inc. that severance payments are wages subject to FICA taxes.

Do ministers pay FICA taxes on bonuses?

No. Ministers are generally self-employed for Social Security purposes and pay self-employment tax (the equivalent of FICA for self-employed individuals) on their ministerial income, including bonuses. Churches do not withhold FICA taxes from minister compensation.

Are RSUs subject to FICA taxes when they vest?

Yes. Restricted stock units trigger FICA taxation when they vest (when no longer subject to substantial risk of forfeiture), based on the fair market value on the vesting date.

Can religious organizations claim exemption from FICA taxes on employee bonuses?

Yes, if approved. The Tax Reform Act of 1984 allows religious organizations to elect exemption from the employer’s share of FICA taxes if they oppose such taxes on religious grounds by filing Form 8274. However, the exemption applies only to the employer’s share, not the employee’s share.

Are commissions subject to FICA taxes?

Yes. Commissions are wages subject to the 6.2% Social Security tax and 1.45% Medicare tax, identical to the treatment of bonuses.

Is the Additional Medicare Tax withheld from bonuses?

Yes, if applicable. When a bonus pushes the employee’s total wages above $200,000, the employer must withhold the 0.9% Additional Medicare Tax on the excess amount.

Can an employer gross up a bonus to cover FICA taxes?

Yes. Employers may calculate a grossed-up bonus amount that covers federal income tax, FICA taxes, and state taxes, allowing the employee to receive a specific net amount.

Are bonuses subject to federal unemployment tax (FUTA)?

Yes. Bonuses are wages subject to FUTA tax, which employers pay at a rate of 6% on the first $7,000 of wages per employee per year (subject to certain credits).