Q: The company pays bonuses to employees every fall. We’ve run across several 2014 W-4 forms on which employees claim an exemption from federal and state income tax withholding. Can we still withhold using the 25% flat supplemental withholding rate for federal purposes?
A: Yes, assuming employees had income taxes withheld last year and their supplemental wages this year don’t total more than $1 million. If employees’ supplemental pay exceeds $1 million, you must withhold income taxes at the 39.6% rate. Reminder: The employee Medicare withholding rate increases to 2.35% once regular and supplemental wages exceed $200,000.
W-4s on which employees claim an exemption from income tax withholding must be refiled every year to continue the exemption. So a quick look at their 2013 W-4s will confirm whether they had taxes withheld last year.
If employees claimed an exemption from income tax withholding in 2013, you must use the aggregate method to determine withholding on the bonus this year: Combine bonuses with employees’ regular pay and withhold on the total as if it was a regular wage payment; subtract the tax withheld from regular wages (which will be $0) and withhold the remaining tax from the supplemental wages.