Incentive bonuses and taxes

Leslie · January 2003

We started a perfect attendance program the last quarter of 2002. Now that it's time to hand out the cash, the HR manager wants to run it through payroll so it is added to the employee's gross and taxed. This seems crazy to me and a lot of extra work, plus the employee doesn't get the amount they were promised. Is it necessary? If it matters, I'm in Arizona.

Brad Forrister · January 2003

The HR manager is right. Almost all incentive awards are taxable. Some employers "gross up" the award so the employee gets its after-tax value. But it still has to be reported as income, and it's subject to withholding.

Brad Forrister
Director of Publishing
M. Lee Smith Publishers

Leslie · January 2003

I figured as much because I know all bonuses are taxed, but was hoping if we phrased it as an award or gift we might not have to. Thanks.

Lori B · January 2003

No dice. The IRS sees this as supplemental wages and they want their tax....

Keep in mind that the supplemental flat tax rate applies to bonuses.

Don D · January 2003

Against the advice some will post, according to the size of the bonus, The IRS won't find it problematic if you give them a Wal-Mart card instead of running it through payroll. I know, I know......that's legally taxable too. Fact is we have specifically asked the IRS and have their nod to do it. Ours is only $50 for perfect attendance. Both our CFO and Controller are CPA's and claim to have fully researched this and if a Controller is comfortable, I'm comfortable. But I have my hard hat on since the Forum's accountants are about to stone me.

NaeNae55 · January 2003

A Walmart card is considered a gift, not cash, and if it is small enough it is considered to be "de minimus." If you give cash, even if it is only $5.00, the IRS requires their due. That is why we give gift certificates. x:-)

Leslie · January 2003

We give away gift certificates galore with a customer service program we call smile. However the employees really prefer cash, then scream bloody murder when we have to run it through payroll. Oh well...

Petard · February 2003

Sorry, Leslie. It's probably even worse than you think. If the employees knew beforehand what they needed to do to earn the bonus (e.g., have no unexcused absences or whatever), then the bonus should also be applied to their wages during the time period covered. Presto, you now may owe additional overtime for the weeks in which they earned overtime pay.

Let's say they earned $130 attendance bonus for the quarter. (I can do the math this way.) The effect of the bonus was to add $10 of "wages" to each week of the quarter, or $0.25 per hour to a 40-hour worker. For each week during which they had overtime, you now owe $0.125 (in other words, the overtime premium of one-half the wage "increase") per hour of overtime worked.

Do many companies do this? I dunno, but that's between you and the DOL. If the amount you pay is smaller than my example, you may find protection in the de minimis clauses that NaeNae55 cited.

The safe-harbor alternative is to calculate the bonus as "x-percent" of wages, including overtime, paid during the quarter. If you pay cash, you still have the tax withholding issue, no matter what.

Those darn HR managers are always raising a stink, huh?

Incentive bonuses and taxes

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