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The stars have aligned, and finally you’re set to collect a meaningful bonus for your hard work. Now you can take that vacation you’ve dreamed of, pay off a loan or help build your savings.

Or can you? The answer depends in part on how much of that bonus you’ll actually take home, because your employer withholds a portion to cover anticipated taxes, and on how much ends up going to taxes after you file your return. Let’s talk about how bonuses are taxed, and the factors that can impact the government’s share of your hard-earned bonus.

How are bonuses taxed when paid?

The Internal Revenue Service classifies bonuses as a form of “supplemental wages.” The first thing affecting the withholding on your bonus is whether your employer chooses to break it out from other compensation, like regular wages, that you collect in the same pay period, according to the IRS’s Employer’s Tax Guide. If your employer doesn’t break out the bonus separately, the IRS says it should withhold on the total amount as if it were all regular wages.

What if your employer does identify how much of your compensation for a pay period is a bonus? The withholding process still depends—this time, on whether your employer currently withholds money for taxes on your regular wages, or did so in the previous year. If it is, or it did, the IRS gives two options for withholding on the bonus:

  • Withhold taxes at a rate of 25 percent—regardless of your actual tax bracket.
  • Determine how much it should withhold on all your compensation for the pay period as if it were all regular wages. In this option—which is obviously more complicated, and can result in more of your bonus being withheld for taxes—your employer then reduces that amount by what it should withhold on the regular pay, and withholds the remainder on the bonus.

Wondering what to do with that fat bonus check? Consider socking it away in a CD.

Are additional taxes due?

If your employer isn’t withholding for taxes on your regular wages, and didn’t do so in the previous year, it’s supposed to withhold on the bonus using that last, most complicated option.

Finally, if your combined supplemental wages from one employer for a calendar year exceed $1 million, the rules described above apply to the first $1 million, but withholding on the rest is at the top federal income tax rate, currently 39.6 percent.

Your bonus is also subject to Social Security and Medicare taxes, as well as any applicable state income tax.

How are bonuses taxed when you file?

Beyond the impact on your take-home pay, a bonus could bump your total taxable income into a higher bracket for the year. As a result, the amount of your income that falls within your new bracket would be taxed at a higher rate.

Suppose, for example, that your income typically falls in the 25 percent bracket, which for 2017 applies to income between $37,950 and $91,900 for someone filing as unmarried. If your bonus brings your income to $91,901 or higher, the portion above that figure would be taxed at 28 percent.

As with other income, you could get back some of the amount withheld on your bonus after filing your return, especially if you have high deductions for things like mortgage interest, state and local taxes, medical expenses and/or charitable contributions

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