Bonuses: What You Need to Know

With the year-end approaching fast, some employers are getting ready to pay out bonuses to employees.  The IRS considers a bonus to be supplemental wages.  Before bonuses are paid out, an employer must determine how much to withhold for Federal taxes.  There are a few different ways of going about this.

Combine with regular payroll.  One option is to combine the bonus payment with a regular payroll payment.  In this case the Federal Withholdings will be calculated based on the employee’s Form W-4.

Separate bonus payment.  There are two different methods to calculating Federal Withholdings if you are paying a bonus separate from a normal payroll.  The two methods are Percentage and Aggregate.

  • Percentage. You can decide to withhold at a flat rate of 25%. This is the easiest method for determining how much to withhold.
  • Aggregate. You can decide to add the bonus to the prior payroll and recalculate the Federal Withholdings based on the employee’s Form W-4. Then you subtract out the Federal Withholdings from the prior payroll and you have the amount to withhold from the bonus.

Bonus over $1 million.  If an employee receives over $1 million dollars in supplemental wages, the amount over $1 million is taxed at 39.6%.  The amount up to $1 million is still taxed at the 25% flat rate from above.

Garnishments.  One thing to consider with bonuses is garnishments such as child support.  Each state has their own process for lump sum payments such as bonuses.  Some states require you to report to them the amount of the payment before you pay it out.  Some Income Withholding Orders contain a section with rule for what to do in event of a lump sum payment.  For a state by state list of rules CLICK HERE.

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