California Tax Guide
How Are Bonuses
Taxed in California?
Federal supplemental withholding runs at 22%. California adds its own mandatory 10.23%. That combined 32.23% is what comes out of most California employees’ bonuses — before FICA. Here’s what it means for your return.
The Short Answer
Bonuses paid in California are subject to 22% federal supplemental withholding (for amounts under $1 million) plus California’s mandatory 10.23% supplemental withholding rate — a combined 32.23% before Social Security and Medicare. That withholding is not your final tax bill. At year-end, your bonus income rolls into your ordinary income, and you’re taxed at your actual marginal rate. If the flat-rate withholding was too high, you get a refund. If it was too low — which is common for high earners — you owe more.
The question most people are really asking is: why does my bonus check look so much smaller than the gross amount? The answer is that California and the federal government both require employers to withhold at a mandatory flat rate on supplemental wages — which bonuses are — rather than using the graduated withholding schedule that applies to regular salary. The rates feel aggressive because they are. But withholding is a prepayment mechanism, not a separate tax category. The bonus itself is taxed as ordinary income.
Federal Supplemental Wage Withholding Rates
The federal supplemental wage withholding rate is 22% for bonus payments up to $1 million in a calendar year, and 37% for any amount over $1 million in a single payment. These rates are set under IRC § 3402(g) and the corresponding Treasury regulations.
Supplemental wages are defined under Treas. Reg. § 31.3402(g)-1 as wages paid in addition to the employee’s regular wages — including bonuses, commissions, overtime pay, back pay, and similar payments. The IRS treats these separately because they are not paid in the normal payroll cycle and would distort the graduated withholding tables if run through the standard calculation.
The 22% rate applies when the employer has already withheld on the employee’s regular wages in the current year or preceding year. If an employer has not withheld on any regular wages, a different approach applies — but in practice, the 22% flat rate covers the vast majority of bonus situations.
For very large bonuses that push over $1 million in a single payment, the amount over $1 million is withheld at 37% — the current top federal income tax rate. This is rare for most employees, but it comes up for executives and for large one-time equity liquidation events.
The Two Federal Withholding Methods: Flat Rate vs. Aggregate
Employers generally have two options for calculating federal withholding on a bonus payment. The result can differ significantly.
Method 1: The Flat Rate (Percentage) Method
The most common approach. The employer withholds 22% of the bonus amount, period. Simple to calculate, easy to communicate to employees.
Example: An employee receives a $10,000 year-end bonus. Federal withholding under the flat rate method is $2,200. California withholding is $1,023 (10.23%). Social Security withholding (6.2%) adds $620, and Medicare (1.45%) adds $145. The employee’s net check is approximately $6,012 before any pre-tax benefit deductions.
Method 2: The Aggregate Method
The aggregate method treats the bonus and the employee’s regular wages from the most recent pay period as a single combined payment, calculates the total withholding, and then subtracts what was already withheld on the regular wages. The remainder is what the employer withholds from the bonus.
Example: The same employee earns $8,000 per month in regular salary (before taxes). In the month the bonus is paid, the employer calculates withholding as if the employee earned $18,000 ($8,000 regular + $10,000 bonus) in that single pay period, then subtracts what was already withheld on the $8,000. If the combined income puts the employee into a higher withholding bracket for the period, the aggregate method results in more being withheld from the bonus than the flat rate method would.
The aggregate method is sometimes used for employees who have asked their employer to withhold at a higher rate, or in situations where the employer’s payroll system defaults to it. Employees who receive bonuses at the aggregate method often see a larger hit than expected — though again, this is a withholding issue, not a final tax liability issue.
The choice between methods belongs to the employer, not the employee, under Treas. Reg. § 31.3402(g)-1(a). Employees cannot require a specific method but can adjust their year-end exposure through Form W-4 or estimated payments.
California's 10.23% Supplemental Withholding Rate
California’s mandatory supplemental wage withholding rate is 10.23% as of 2026. This rate is set by the Franchise Tax Board under California Revenue and Taxation Code § 18663 and applies to bonuses, commissions, and other supplemental wages paid to California residents or earned in California.
This is an important point that gets missed regularly: California does not conform to the federal supplemental withholding rate. The 22% federal rate has nothing to do with what California requires. The FTB sets its own rate independently, and that rate changes periodically based on FTB guidance. For 2026, it is 10.23%.
The California supplemental withholding requirement applies to any employer paying wages earned in California — including out-of-state employers with California employees. It is not optional. Employers who fail to withhold at the required California rate face FTB penalties under California Revenue and Taxation Code § 19006.
California does permit a method similar to the federal aggregate method, but the default and most commonly used approach is the flat 10.23% rate. Employers who want to use an alternative method need to follow specific FTB procedures.
Federal + California Withholding Rates at a Glance
| Tax / Withholding | Rate (2026) | Authority | Applies To |
|---|---|---|---|
| Federal supplemental withholding (under $1M) | 22% | IRC § 3402(g); Treas. Reg. § 31.3402(g)-1 | All supplemental wages, including bonuses, commissions, overtime |
| Federal supplemental withholding (over $1M) | 37% | IRC § 3402(g) | Portion of a single payment exceeding $1 million |
| California supplemental withholding | 10.23% | Cal. Rev. & Tax. Code § 18663; FTB guidance | Wages earned in California; California residents |
| California SDI (no wage cap as of 2024) | 1.1% | Cal. Unemp. Ins. Code § 2901 et seq. | All wages including bonuses; no annual cap |
| Social Security (OASDI) | 6.2% | IRC § 3101(a) | Up to the annual wage base ($176,100 in 2025) |
| Medicare (HI) | 1.45% (+ 0.9% above $200,000 single / $250,000 MFJ) | IRC § 3101(b); IRC § 3102 | All wages; no cap; additional 0.9% for high earners |
Put it together for a typical California employee receiving a bonus under $1 million: combined mandatory withholding is 32.23% for income tax purposes alone (22% federal + 10.23% California), plus another 8.65% or more in FICA taxes depending on where you are relative to the Social Security wage base. For someone who hasn’t yet hit the Social Security wage cap, total withholding on a bonus can exceed 40%.
California SDI on Bonuses
Yes — California State Disability Insurance (SDI) withholding applies to bonus payments. Following the elimination of the annual SDI wage base cap in 2024, SDI now applies at 1.1% to all wages with no annual ceiling.
Prior to 2024, California SDI had an annual taxable wage limit that meant high earners stopped paying SDI partway through the year. That cap was repealed effective January 1, 2024. Now, every dollar of wages — including bonuses, commissions, and other supplemental wages — is subject to the 1.1% SDI withholding for the full year regardless of how much you’ve already earned.
SDI is an employee-side withholding. The employer does not pay SDI; the employee does, through payroll withholding. It appears on your W-2 in Box 14 as “CASDI” or similar. It is deductible on your federal return as a state and local tax if you itemize, though the $10,000 SALT cap limits the practical value of that deduction for most California taxpayers.
Year-End Reconciliation: What Withholding vs. Actual Liability Really Means
Withholding on a bonus is not the final answer. It is an estimate — a mandatory one set by statute, but still an estimate. Your actual tax on the bonus depends on your total annual income and your effective marginal rate.
Here’s the short version of why the two numbers diverge:
- The flat rate method withholds at 22% regardless of your actual bracket. If your marginal federal rate is 24% or 32%, the 22% withholding was too low and you will owe the difference. If your marginal rate is 12%, the 22% withholding was too high and you’ll receive a refund.
- California’s 10.23% rate is similarly imprecise. California’s top individual income tax rate is 13.3% (for income above $1,000,000). For a married couple earning $500,000 combined, the marginal California rate is 10.3% or 11.3% depending on income — which might actually be close to the 10.23% withholding rate, or might be lower. For a single filer in the 9.3% bracket, California withheld slightly more than the ultimate liability, and they’ll get that back.
- The bonus is reported on your W-2 as ordinary wages in Box 1. When you file, it’s just income — your return does not treat it differently from salary. The tax you owe is determined by applying the rate schedule to all of your income together.
This is also why large bonuses can push people into a higher bracket for the year when combined with salary. If your salary puts you in the 22% federal bracket but your bonus pushes the top slice of your income into the 24% bracket, the portion in the 24% bracket is taxed at 24%. The withholding — done at the time of payment without knowledge of your full-year income — may not have captured that.
If you’re in a situation where bonus income, equity vesting, or other supplemental wages are creating significant year-end tax liability, the California FTB balance due problem often traces back to a mismatch between supplemental withholding rates and actual marginal rates — something that can be corrected proactively through estimated payments or W-4 adjustments.
RSUs, Stock Options, and Equity Compensation in California
When restricted stock units (RSUs) vest, the fair market value of the shares on the vesting date is classified as supplemental wages and is subject to the same withholding rates as a cash bonus: 22% federal and 10.23% California.
This is one of the most common sources of tax underpayment for California tech workers. Here’s why:
When RSUs vest, the employer is required to report the full fair market value as ordinary compensation income on the employee’s W-2. The employer withholds at the supplemental rates — typically 22% federal and 10.23% California. But many employees at technology companies are in the 32%, 35%, or 37% federal bracket by the time their RSUs vest. The 22% withholding covers only part of the federal liability. The gap becomes a balance due at tax time.
There are two common approaches to closing that gap:
- Net settlement / sell-to-cover: The employer withholds shares at vesting to cover the tax liability. This is the most common approach. The number of shares withheld is based on the supplemental rate, not the employee’s actual marginal rate — so the same underpayment issue can occur if the actual rate is higher.
- Same-day sale: The employee sells shares immediately upon vesting to fund the tax liability. This gives more flexibility to calibrate the payment, but it still requires the employee to understand what their actual marginal rate is.
For nonqualified stock options (NQSOs), the spread between the exercise price and the fair market value at exercise is also treated as ordinary compensation income subject to supplemental withholding. Incentive stock options (ISOs) are treated differently — there is no regular income tax withholding at exercise, but alternative minimum tax (AMT) exposure is a real concern in California, which does not conform to the federal AMT exemption amounts in all respects.
Equity compensation income also raises questions about California-source income if the employee worked in multiple states during the vesting period. California taxes the portion of RSU income allocable to California services, based on an apportionment calculation. If you’ve moved into or out of California during a multi-year vesting schedule, the allocation can be complex and is frequently contested.
Lottery winnings and large prize payments from California sources follow a similar supplemental wage framework — if you’re curious how that intersects with California’s withholding rules, the California lottery tax treatment analysis covers the same underlying mechanics.
Signing Bonuses
Signing bonuses are treated as supplemental wages and are subject to the same 22% federal and 10.23% California withholding rates as any other bonus.
There is no special tax treatment for signing bonuses. The IRS and the FTB do not distinguish between a year-end performance bonus and a bonus paid to induce an employee to accept a job offer. Both are compensation income, both are supplemental wages, and both are subject to mandatory flat-rate withholding.
One issue that comes up with signing bonuses is the clawback provision. Many employers require an employee to repay all or part of a signing bonus if the employee leaves within a certain period — typically one to two years. If a clawback occurs, the employee may have a deduction (or a claim of right adjustment under IRC § 1341) for the repaid amount. The deduction mechanism depends on whether the repayment happens in the same tax year as receipt or a subsequent year, and whether the amount exceeded $3,000. This is an area where getting the treatment right on the return matters — the numbers can be significant.
What to Do If Too Much Was Withheld
If the flat-rate withholding on your bonus exceeds your actual marginal rate — which is common for employees in lower brackets — you have a few options:
- Do nothing and get a refund at filing. The most common path. When you file your federal and California returns, the excess withholding is returned to you. The tradeoff is that you’ve effectively given the government an interest-free loan until refund time.
- Adjust your Form W-4 for the remainder of the year. If you know a significant bonus has been withheld at the flat rate and you expect a refund, you can reduce your ongoing withholding from regular wages by updating your W-4 with your employer. This recalibrates your total annual withholding closer to your actual liability.
- Claim a California Employee’s Withholding Allowance Certificate (Form DE 4) adjustment. The California equivalent of the federal W-4. You can use Form DE 4 to reduce California withholding on your regular wages if you expect to receive a California refund due to bonus overwithholding.
If the withholding was too low — more common for high earners, especially those with equity compensation — the solution is either additional W-4/DE 4 adjustments or quarterly estimated tax payments to the IRS (Form 1040-ES) and California FTB (Form 540-ES). California assesses an underpayment penalty under California Revenue and Taxation Code § 19136 when the balance due exceeds a certain threshold, regardless of whether you eventually pay in full.
Employer Compliance: Misclassifying Bonus Withholding
For employers, the withholding requirements on supplemental wages are mandatory. Failing to withhold at the correct rate — or treating bonuses as regular wages run through the standard graduated withholding table — creates compliance exposure with both the IRS and the FTB.
Under IRC § 3402, employers who fail to withhold on supplemental wages at the required rate are personally liable for the amount that should have been withheld, even if the employee ultimately pays the underlying tax on their own return. The IRS and FTB view withholding failures as employer obligations, not employee problems. Penalties under IRC § 6656 apply to deposits that are late or underfunded.
California Employment Development Department (EDD) audits specifically examine bonus and supplemental wage withholding as part of payroll tax audits. If an EDD auditor finds that bonuses were run through regular payroll without applying the 10.23% supplemental rate, the employer faces both a principal assessment and penalties. The EDD tends to look at this closely when bonus amounts are large relative to the employer’s total payroll.
There is also an issue that comes up when employers reclassify what were actually bonus payments as something else — business expenses, independent contractor payments, or non-wage distributions to owners. If the EDD or FTB determines that payments were wages misclassified to avoid withholding obligations, the result is an employment tax assessment with interest and penalties that can substantially exceed the original withholding obligation. That is a separate but related problem from how bonuses are taxed on the employee side — and it’s one that requires a different kind of defense than simply correcting a withholding rate.
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Frequently Asked Questions
How are bonuses taxed in California?
Bonuses paid in California are subject to 22% federal supplemental withholding (for amounts under $1 million) plus 10.23% California state withholding as of 2026, totaling 32.23% before FICA taxes. California’s rate is set by the FTB under California Revenue and Taxation Code § 18663 and does not mirror any federal rate. At year-end, the bonus is included in ordinary income and taxed at your actual marginal rate — withholding is just a prepayment estimate.
What is the bonus tax rate in California for 2026?
California’s mandatory supplemental wage withholding rate for 2026 is 10.23%. Combined with the federal flat rate of 22%, California employees see a combined income tax withholding rate of 32.23% on most bonus payments. The 1.1% SDI withholding (no wage cap as of 2024) and FICA taxes apply on top of that.
Are bonuses taxed differently than regular wages in California?
Yes, in terms of withholding mechanics — but not in terms of ultimate tax liability. Bonuses are classified as supplemental wages under IRC § 3402(g) and California Revenue and Taxation Code § 18663, which means employers use mandatory flat withholding rates rather than the graduated tables that apply to regular salary. At year-end, bonus income is included in ordinary income and taxed at your actual bracket. The difference is when and how the withholding is calculated, not whether bonuses face a special tax rate.
Why does my bonus check look like it lost so much to taxes?
Mandatory withholding on bonuses runs at a combined 32.23% (22% federal + 10.23% California) before FICA taxes. For many employees, total withholding on a bonus exceeds 40%. If your actual marginal rate is lower than the flat withholding rate, you’ll receive a refund when you file. If it’s higher — common for high earners — you’ll owe more. The withholding looks aggressive because it’s a flat rate applied to what looks like a large one-time payment, not because bonuses carry a separate tax penalty.
Are RSU vesting events taxed the same way as cash bonuses in California?
Yes. When RSUs vest, the fair market value of the shares on the vesting date is treated as ordinary compensation income and classified as supplemental wages. Employers withhold at the same rates: 22% federal and 10.23% California. For high-income employees — particularly at technology companies — the 22% federal withholding rate is often well below their actual marginal rate, which creates an underpayment that becomes a balance due at filing. Adjusting W-4 withholding or making estimated payments through Form 1040-ES and California Form 540-ES is how most employees in this situation manage the gap.
Do bonuses count toward California SDI withholding?
Yes. California SDI applies to bonuses and all other supplemental wages. Following the repeal of the annual SDI wage base cap in 2024, SDI now applies at 1.1% to all wages with no ceiling. This applies to the full amount of a bonus regardless of how much the employee has already earned in the year. SDI appears on your W-2 in Box 14 and is deductible as a state and local tax if you itemize on your federal return, subject to the $10,000 SALT cap.
What should I do if too much was withheld from my bonus?
If flat-rate withholding exceeds your actual marginal liability, you will receive a refund when you file your federal and California returns — no special action needed. To avoid waiting until filing, you can update your Form W-4 with your employer to reduce withholding on regular wages for the remainder of the year, effectively adjusting your total annual withholding. California Form DE 4 works the same way for state withholding. If you’d prefer to understand your specific situation before making any adjustments, a 15-minute call is a reasonable starting point.
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