Tax on a Final PTO or Bonus Payout

Updated August 3, 2026. Quick answer: a big final payout is usually withheld at a flat 22% if it is paid separately from your regular wages — and withholding is not the tax you owe. It is a deposit. If your actual rate is higher you will owe more in April; if lower, you get it back. Above $1 million of such payments in a year the rate becomes 37% and is mandatory.

The two methods

From supplemental wages paid after December 31, 2004, by using a flat percentage rate of 28 percent (or the corresponding rate in effect under section 1(i)(2) for taxable years beginning in the calendar year in which the payment is made). … Income tax has been withheld from regular wages of the employee during the calendar year of the payment or the preceding calendar year. … If not paid concurrently, the supplemental wages are aggregated with the wages paid or to be paid within the same calendar year for the last preceding payroll period or for the current payroll period, if any. The amount of tax to be withheld is determined as if the aggregate of the supplemental wages and the regular wages constituted a single wage payment for the regular…

— 26 CFR 31.3402(g)-1(a)(1)(i)-(ii) and related paragraphs (Treasury regulation implementing IRC 3402(g)); IRS Publication 15 (Circular E), ‘What’s New’

So an employer may either apply a flat percentage to the payment on its own, or aggregate it with your regular wages and withhold as though the whole thing were one paycheque for the period. The flat method may only be used if income tax was withheld from your regular wages in the current or preceding year — which for someone finishing a career it almost always was.

The aggregate method often withholds more, because a payroll system treats one huge cheque as though you earned that much every period and applies the resulting rate. That is a withholding artefact, not a tax increase, and it comes back on the return.

The current flat rate is 22%, per the 2026 edition of the IRS employer guide. Note the regulation itself prints an older percentage and cross-references the current statutory rate rather than restating it — which is why the operative number comes from the annual publication and why we name the edition.

Above $1 million it stops being optional

If a supplemental wage payment, when added to all supplemental wage payments previously made by one employer (as defined in paragraph (a)(3) of this section) to an employee during the calendar year, exceeds $1,000,000, the rate used in determining the amount of withholding on the excess (including any excess which is a portion of a supplemental wage payment) shall be equal to the highest rate of tax applicable under section 1 for such taxable years beginning in such calendar year. This flat rate shall be applied without regard to whether income tax has been withheld from the employee’s regular wages, and without regard to any entries on Form W-4, including whether the employee has claimed exempt status on Form W-4 or whether the employee has…

— 26 CFR 31.3402(g)-1(a)(2) (Treasury regulation implementing IRC 3402(g)); IRS Publication 15 (Circular E), ‘What’s New’ (2026 revision)

Three things in that provision are worth reading carefully. The threshold is cumulative across the calendar year from one employer, not per payment. The rate applies only to the excess over the million. And it is applied without regard to any entries on your Form W-4 — including an exemption claim. The regulation calls it mandatory flat rate withholding, and the optional 22% method is simply unavailable for that excess.

Why the number on the payslip alarms people

Because a final payout arrives with what looks like a punitive deduction, in a month when someone is already anxious about money stopping. It is a deposit against a bill that is calculated later on your actual total income. If this is your final working year, your total income for the year may well be lower than usual, and over-withholding is the common outcome rather than under-withholding.

What actually decides the bill is which calendar year the money lands in — which is the whole argument of the December-or-January decision.

What we could not confirm, and it matters here. We wanted to state plainly that a lump-sum PTO or accrued-leave payout is supplemental wages. We could not verify it: the IRS employer guide’s own section on supplemental wages would not load past its table of contents, and the PDF could not be read. What we did find in the Treasury regulation cuts partly the other way — it says amounts of so-called vacation allowances are withheld as though they were regular wages for the period covered by the vacation. That addresses vacation taken, not a lump sum cashed out at separation, and the two are plainly different situations — but we are not going to assert the classification of your payout when the source we needed was unreadable. Ask your payroll department which method they are applying to it.

Related: which year it lands in · why the year matters two years later.

General information drawn from IRS publications and the Internal Revenue Code, not tax or financial advice. Withholding is not the same as the tax you owe – it is a deposit against it, and the two are reconciled on your return. Rates, thresholds and plan rules change; every figure here names the edition it came from. What your employer plan permits is set by its own documents, which may be narrower than the law allows.