Year-End Bonuses Done Right
It is the time to give, to reward those who have worked with you and helped you and your business during the year, and what better way to do it than through a bonus. However, giving bonuses has some implications that we will share with you below.
The first thing you need to know is: Bonuses are subject to taxes, to the same taxes as an employee’s regular wages. You must withhold federal income, Social Security, and Medicare taxes, along with state and local income taxes (if applicable) from bonuses.
When it comes to withholding federal income tax from bonus payments, you have one of two options. Why? Because a bonus is known as a type of supplemental wage.
- Withhold the supplemental tax rate of 22%
- Add bonus amounts to regular wages and withhold taxes on the total (if paying bonus concurrently with regular wages)
If you use any payroll software, calculating taxes on year-end bonuses, like tax calculations on regular wages, should be a breeze (and if you are one of our clients it is even easier).
The second thing to keep in mind is: If you decide to give your employees a bonus of $300, you should know that as well as their salary, they will receive less than that gross amount.
The reason, you need to subtract federal income, Social Security, and Medicare taxes from the $300 gross amount:
- $300 X 0.22 (supplemental tax rate) = $66.00
- $300 X 0.0765% (employee portion of Social Security and Medicare taxes) = $22.95
- $300 - 66.00 - $22.95 = $211.05 (bonus take-home amount)
Your employee will take home a bonus for $211.05 when in fact you wanted to reward him with $300 and that’s not even accounting for any applicable state and local taxes.
If you want to prevent your employee from receiving an unequal bonus, you need to do the math backward calculating the gross from the net amount.
The most important thing to do after giving the bonus is to include it in the W2 of your employees. The W2 is the form where you report all wage and tax-related information, including employee taxable wages; income, Social Security, and Medicare taxes withheld; and benefits that impact taxes. All employers are responsible for filling out a W-2 for each employee paid during the year.
Oh wait, this is important! If you don't give the bonus to your employees before December 31st, you don’t need to include it on their 2021 Form W-2. You'll need to report it the following year on a 2022 Form W-2.
At My Books and Taxes, we dedicate ourselves to providing the best payroll services. If you need help go ahead and schedule an Introductory Call with our Expert Team.