The holidays are nigh—a time filled with goodwill toward all. Except maybe for you, as you’re charged with handling a bonus payroll, in addition to the regular payroll.
If holiday bonuses are in your company’s future, be sure to cover these bases.
Tax matters. Bonuses are always taxable. You do, however, have leeway when it comes to determining how they’ll be paid and the income tax withholding method to apply. Unless employees have maxed out on the Social Security portion of FICA, the full FICA withholding rate applies. For those who have maxed out, withhold the 1.45% Medicare portion of FICA.
The boss handing out separate bonus checks is drilled deep into the American psyche. Provided employees’ regular wages are subject to income tax withholding (i.e., they don’t claim exempt on their W-4s or a high number of allowances), you can, but aren’t required to, withhold income taxes at the flat 25% rate. On the other hand, if you want to skip the paperwork extra checks generate, you can combine the bonuses with employees’ regular pay and withhold on the total as if they were regular wage payments.
Your final choice is to ditch employee withholding altogether and have the company pick up the taxes by grossing-up the bonuses. Bonuses are supplemental pay. Under a special income tax withholding rule, you must withhold 35%, without regard to an employee’s W-4 form, on the amount of supplemental pay that exceeds $1 million. If a holiday bonus will boost the employee’s supplemental pay over $1 million, you may withhold 25% on the portion of the payment up to $1 million and 35% on the portion that exceeds $1 million. Alternatively, you may withhold 35% on the entire payment.
PAYROLL PRACTICE TIP: Alert Accounting after scheduling the bonus payroll, since it must ensure that there’s enough cash in the payroll accounts on the bonus payday. Also, check whether the bonuses will affect your federal and state tax deposit schedules. Reminder: If you accumulate undeposited federal taxes of $100,000 on any day in a deposit period, those taxes must be deposited by the next banking day, regardless of your regular deposit schedule.