Whether you’re getting your first job after medical school or are simply moving to a new employer, it’s a good idea to negotiate your compensation package to try to make as much money as you can.
One thing you can negotiate is your sign-on bonus. This is a bonus you receive immediately when you take a new job, and it can come in the form of cash or other compensation, such as stock options. Most physicians will get simple cash bonuses.
You may have heard that bonuses are taxed at a higher rate than other income. This is not strictly true. We’ll cover how sign-on bonuses are taxed, why you may have heard this myth, and what you can do to keep more of your bonus when you receive it.
Sign-On Bonuses Are Taxed Like Normal Income
In general, the income you earn is subject to income tax. That includes wages, interest from your savings accounts and investments, and money you earn from a side gig or other work. The rate of tax you pay depends on the amount of money that you earn each year.
While some forms of income, like income from selling investments, are taxed differently from your work earnings, sign-on bonuses are treated like any other form of compensation from employment. They are taxed at your normal rate.
However, just because you owe the same amount in tax on bonuses doesn’t mean that you might see your bonus treated differently on your paycheck.
How Paycheck Withholding Works
Each time you get a paycheck, your employer deposits the money in your bank account. The amount you receive is whatever you earn for the pay period, minus any deductions and withholding.
With each paycheck, you can deduct money for purposes like paying for health insurance or retirement investing. Your employer also withholds money for taxes. The amount withheld depends on how much money you make each year and the information you submitted on your Form W-4—which outlines your expected deductions, filing status, and earnings from other work.
Here's a simplified example. Imagine you earn $4,000 each week and get a weekly paycheck. That means you make $208,000 per year. You file as a single person and take no deductions at all, and you receive no tax credits. The federal income tax owed on an annual income of $208,000 would be $43,015.68. Your employer would withhold $827.22 from each paycheck for federal taxes to cover your full tax liability.
In reality, withholding is more complicated because of the many tax credits and deductions available, as well as how other income and earnings from other work or your spouse’s job impact your taxes.
More information here:
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How Withholding Works for Bonuses
When it comes to tax withholding for your sign-on bonus, your employer can use one of two methods.
The Percentage Method
The percentage method of withholding bonuses is one of the most popular options for employers, largely because it is the easiest. The employer treats the bonus as income separate from your wages and withholds money at a flat percentage rate. The withholding rate is 22% for bonuses up to $1 million and 37% for bonuses over that amount.
That means that if you get a $50,000 sign-on bonus, your employer will withhold $11,000 of it and deposit only $39,000 into your bank account.
The Aggregate Method
Employers using the aggregate method simply treat the bonus as regular income on your paycheck. The tax withholding is then calculated using the tax rate that would apply to your annual income, assuming that your paycheck amount remained the same throughout the year.
Let’s return to the above example where a physician earns $4,000 a week and has $827.22 withheld from each paycheck. Imagine that a doctor receives a sign-on bonus of $36,000. Their next paycheck will be $40,000.
To determine the amount withheld, their employer will multiply $40,000 by the number of paychecks each year (52) to arrive at a projected annual income of $2.08 million. The tax owed on an income of $2.08 million would be $725,556.88. Divide that number by 52 to arrive at how much would be withheld from each paycheck: $13,953.02.
This results in a withholding rate of 36.44% on the amount of the bonus, even though the physician's tax rate will only be 32%.
How to Keep More of Your Bonus Up Front
When you get a bonus, there’s no avoiding the income taxes you have to pay. However, if your employer withholds more than necessary, you’ll have to wait until you file your tax return the next year to get some of your bonus money back. The best way to keep more of your bonus in your pocket upfront is to ask your employer to use the flat rate method of withholding rather than the aggregate method, which results in 22% of the bonus amount being withheld.
Most physicians are likely to be in a tax bracket that results in a tax rate of 22% or higher. That's a taxable income of at least $50,401 for single filers and $100,801 for those married filing jointly) [2026 — visit our annual numbers page to get the most up-to-date figures]. So, the flat rate method of withholding will be almost certain not to overwithhold.
More information here:
Top 10 Ways to Lower Your Taxes and Lower Your Tax Bracket
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Watch Out for Penalties for Underwithholding
One thing that is incredibly important to keep in mind when dealing with income taxes and withholding is the potential for a tax penalty for underwithholding. The IRS wants you to pay your taxes regularly throughout the year rather than as a lump sum when you file your tax return.
If you wind up owing too much when you file your taxes because too little money was withheld from your paychecks, you may owe a penalty. The penalty applies if:
- You owed more than $1,000 AND
- You failed to pay 90% of your total tax owed for the year AND
- You did not already pay at least 100% of the tax you owed in the previous year
For example, imagine that in 2024, you owed $40,000 in tax. In 2025, you had $39,000 withheld from your paycheck but owed $50,000. You would owe a penalty for underwithholding.
The penalty depends on market interest rates, and it changes regularly. At the time of writing, the rate is 7%, so the amount you’d owe is 7% interest on the amount underwithheld, prorated based on when the underwithholding occurred.
To avoid these issues, try to make sure you have bonus income withheld properly, file and make quarterly estimated tax payments, or make sure you meet the safe harbor requirement to avoid penalties—either owing less than $1,000 when you file your return or, more simply, having at least as much as you owed in tax last year withheld.
The Bottom Line
Getting a sign-on bonus can be exciting, and you may already have plans for how you’ll use the money. But you need to keep income taxes in mind. Understanding how withholding works for sign-on bonuses—and how you can make sure you don’t overwithhold or underwithhold—can help you make the most of your bonus.
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