How to tax—or not tax--
year-end bonuses
QuickBooks, Tax and Payroll Blog
Here’s an example from this month’s issue of Business Consulting News from Mike McVay, Accountant, Certified QuickBooks & Payroll ProAdvisor. Mike@MikeMcVay.com - 850-725-5696.
Cash bonuses, no matter how small, are wages subject to FITW, FICA, FUTA and applicable state/local payroll taxes. If given after FIT has been withheld from regular wages—or with regular wages but identified as separate—you can use the 25% supplemental withholding rate. If wages exceed $1 million for the year, withhold at 39.6%. [26 CFR 31.3402(g)-1]
Discretionary (lump-sum) bonuses. To be discretionary (excludable from overtime calculations)—it must be the employer who decides when and how much to give. The bonus cannot be required by a contract, agreement or promise, or be given in a pattern so that it is expected. To be discretionary, the bonus must be a complete surprise to the employee.
Exception: Holiday bonuses can be discretionary, even if expected each year. [29 CFR 778.211]
Nondiscretionary bonuses are those required under a contract, agreement or promise, express or implied—e.g., for higher or faster production, as inducements to take a job or not leave—or bonuses employees have come to expect (with the exception of holiday bonuses). Nondiscretionary bonuses for hourly employees must be added to weekly gross pay for the week in which they are earned and must be included when computing the week’s O.T. [29 CFR 7788.209]
Example: Jo earns $14/hr. One week she works 42 hours and earns a $50 prorated production bonus.
Jo’s normal pay: $588 for the week ($14 x 42 hrs) + $50 bonus = $638 straight-time pay.
Overtime pay: $638 for the week (including the nondiscretionary bonus) ÷ 42 hours worked = $15.19 regular rate of pay x 50% premium rate = $7.60 (rounded) x 2 hours’ O.T. = $15.20 (rounded) premium pay.
Gross pay: $638 straight-time pay + $15.20 premium pay = $653.20 gross pay for the week.
Signing and related bonuses. A bonus given for signing or cancelling an employment contract is wages subject to FIT, FITW, FICA and FUTA.
Why risk falling behind?
Cash bonuses, no matter how small, are wages subject to FITW, FICA, FUTA and applicable state/local payroll taxes. If given after FIT has been withheld from regular wages—or with regular wages but identified as separate—you can use the 25% supplemental withholding rate. If wages exceed $1 million for the year, withhold at 39.6%. [26 CFR 31.3402(g)-1]
Discretionary (lump-sum) bonuses. To be discretionary (excludable from overtime calculations)—it must be the employer who decides when and how much to give. The bonus cannot be required by a contract, agreement or promise, or be given in a pattern so that it is expected. To be discretionary, the bonus must be a complete surprise to the employee.
Exception: Holiday bonuses can be discretionary, even if expected each year. [29 CFR 778.211]
Nondiscretionary bonuses are those required under a contract, agreement or promise, express or implied—e.g., for higher or faster production, as inducements to take a job or not leave—or bonuses employees have come to expect (with the exception of holiday bonuses). Nondiscretionary bonuses for hourly employees must be added to weekly gross pay for the week in which they are earned and must be included when computing the week’s O.T. [29 CFR 7788.209]
Example: Jo earns $14/hr. One week she works 42 hours and earns a $50 prorated production bonus.
Jo’s normal pay: $588 for the week ($14 x 42 hrs) + $50 bonus = $638 straight-time pay.
Overtime pay: $638 for the week (including the nondiscretionary bonus) ÷ 42 hours worked = $15.19 regular rate of pay x 50% premium rate = $7.60 (rounded) x 2 hours’ O.T. = $15.20 (rounded) premium pay.
Gross pay: $638 straight-time pay + $15.20 premium pay = $653.20 gross pay for the week.
Signing and related bonuses. A bonus given for signing or cancelling an employment contract is wages subject to FIT, FITW, FICA and FUTA.
Why risk falling behind?
