Federal and state tax rate for bonuses

Forrister7

I understand that taxes need to be deducted from Christmas bonuses, but as a one-time payment, what payroll period are the Federal and state taxes based on? In other words, we pay our employees bi-weekly. Do I use the Federal and state bi-weekly tax tables to figure the deduction, or are there other tables I should be aware of and using?

ritaanz

When we process bonus checks, they are coded as "bonus" and the proper taxes are taken out.

swbpr

We are preparing our Christmas Bonuses at this time and the only taxes we withhold are the required Federal taxes. FICA @ 6.2% and MEDICARE @ 1.45%.

Another thing we do is back the taxes in. For Example, if the bonus amount is $150.00 we show the earnings as follows:

Gross Earnings = 162.43
FICA Taxes = <10.07>
MEDICARE Taxes = <2.36>
Net Christmas Bonus = 150.00

Hope this is helpful.

Forrister7

You mean I've been witholding federal and state taxes in error? How is it that a Christmas bonus is exempt from these taxes?
Your suggestion to back the taxes in is a great one. It also undoes the unfairness of people receiving different net amounts of a Christmas bonus in spite of the gross amount being the same.

swbpr

No, you have not been withholding Fed & State in error, and christmas bonuses are not exempt from these taxes.

Our company figures that since State & Fed taxes are based on what each person claims and how much they make (salary), and since Christmas falls at the end of the year, the $ amount of the christmas bonus is not going to make them owe more state or federal taxes than what has already been withheld throughout the year. Our bonuses range from $20 to $1000.

Now, if your christmas bonuses are a considerable amount in comparison to annual salaries, you may want to go ahead and withhold taxes as you would a regular pay period.

NaeNae55

The IRS requires you to withhold taxes on bonuses, unless the person you are giving the bonus to is exempt from tax withholding. Look in your Circular E (Publication 15) for directions. I believe they are on page 12.

I have seen bonuses given as a flat rate and also grossed up to cover taxes. I always felt the flat rate was better, as if you have 2 managers on the same level and one pays more taxes, they essentially get a better bonus. Doesn't sound fair to me (your tax level is a personal issue that the company should stay out of).

Good Luck!

Lori B

A discussion with your accountant is in order. It would be absolutely inappropriate to only pay FICA on a bonus (social security and medicare). The IRS does impose a flat tax rate for supplemental compensation that applies here. That rate is something like 27% or 28%, I forget the exact rate.

If the actual pay date occurs in calendar year 2002, use the 2002 rates.

As far as gross ups, many people do that, but it is not exactly clean if you are audited by IRS. We have been advised by Ernst and Young to avoid gross ups. Good luck.

Forrister7

Page 12 of Circular E indeed lists bonuses as "Supplemental Wages" and explains methods for witholding income tax on this income(a flat 27% rate!!)Thanks to all for the suggestions.