Bonus Checks and Taxes

napel

We are in the process of presenting some employees with bonus checks. The amount will range from $100 to $500 depending on their time with the company and their position. We have been asked to "gross up" the checks. We will be withholding Social Security and Medicare, of course, but what about Federal Witholding and State Withholding taxes? Is it OK to [I][B]not [/B][/I]withhold that on a bonus check?

NaeNae55

Any cash payment is taxable income. When we gross-up checks, we use a formula (spreadsheet) that includes FICA and average tax withholdings. You can also do it on an individual basis.

Good luck!

Nae

ACU Frank

Remember, the purpose of 'grossing up' is to provide the employee with a bonus that is a specified amount [I]after taxes[/I]. If you simply don't withhold the deductions, you really haven't done that.

For the sake of an example, say the bonus is $500, FICA and Medicare are about $25 and the taxes would be $125. (Yes, if I was doing this in real life my math would be more precise... )

As I see it, these are your three options in order of diminishing positive impact on the employee:

1. Pay $650, grossed up. Employee gets $500 after taxes.

2. Pay $500, don't gross up. Employee gets $350 after taxes.

3. Pay $500, don't gross up and withhold only FICA and Medicare. Employee gets about $475, but will pay the taxes at the end of the year since state and federal were not withheld.

Any bonus is better than no bonus, but if you aren't going to really gross up, at least withhold the taxes. JMO.

napel

We are going to do Option #3. We will take out Social Security and Medicare but not Federal Withholding.

Thank you for your response!

bethk

Ok, I have a question about this. Since this is not a part of their regular income, wouldn't this be considered supplemental wages and be bonus taxed?

Beth

NaeNae55

It can be handled either way. The IRS won't treat it differently in the end though. Both regular wages and bonus wages go into the same box on the W2. The taxes you withhold for both regular income and bonus income also go into the same box on the W2. Sometimes the bonus rate is less than the regular rate, and so the employee sees more cash up front, but sometimes it can be more, depending on the employee's tax rate. The bonus rate is a good way to go though, if you are planning on grossing it up. That way everyone gets the same benefit.

ACU Frank

It's not being fully grossed up, so I'm not sure how I would handle that end of it.