Preparing Payroll for Year-End: Managing Bonus Payments
Each year, employers across the country realize that they need to adjust their payroll data after their final payroll run of the year. In a special three-part blog series, we explore the three most common adjustments that can be avoided with just a little planning. In the second issue of this series, we review employee bonuses.
An employee bonus is defined as compensation in addition to wages and is generally given as a reward for performance. With a few exceptions, both cash and non-cash bonuses are considered supplemental wages by the IRS and are subject to income tax withholding and other payroll taxes. If the bonus is non-cash, such as a trip or stock option, the fair market value of goods or services received must be included in Form W-2 for the year in which the bonus was received.
When processing a bonus payroll, it is important to plan ahead and process bonus payrolls with enough lead time. This will ensure timely delivery and the opportunity to review the accuracy of the checks prior to the check date. Many payroll companies, including BenefitMall, have safeguards in place that require that payrolls must be processed in chronological order. In other words, if you have already run a payroll with a check date of December 20, 2013, you cannot run another payroll with a check date that falls on or before December 20, 2013. Additionally, some payroll processors have safeguards in place that prohibit two payrolls from being processed on the same day, making it important to coordinate your bonus payrolls with your Payroll Specialist so that timing of each payroll run is taken into consideration..
As a bonus will often push an employee’s pay into a higher tax bracket for that pay period, it is important to consider the tax implications for the employee on a local, state and federal level before running the bonus payroll. There are several methods used when calculating taxes for bonus payrolls.
The percentage method calculates federal withholding at a flat 25 percent rate to bonuses paid in amounts up to one million dollars; bonuses exceeding one million dollars are taxed at a 35 percent rate for federal withholding. It is important that all bonuses paid to the employee during the calendar year should be considered when determining whether the recipient is above or below the one million dollar threshold. BenefitMall’s Percentage Method Bonus Calculator can be used to estimate bonus pay and tax withholding amounts.
The aggregate method used calculates the tax amount for the bonus as though it is a standard payroll payment. This method may withhold more from the employees’ pay than necessary, but the overpayment will be returned to the employee at tax time in the form of a refund. Our Aggregate Method Bonus Calculator will assist in estimating bonus pay and tax withholding amounts using this method.
Some employers choose to “gross up” the amount of the bonus to account for taxes so that the employee receives the full intended bonus amount. Using this method, the gross amount of the payment is determined by calculating the tax and adding it to the net pay. BenefitMall’s Gross Pay Calculator is a free tool that can be used as a general guideline for determining the tax amount that should be added to the net pay.
Regardless of the tax calculation method used, it is crucial that all applicable federal, state and local taxes needed are withheld from an employee’s check when bonuses are paid and that all bonus pay information is entered into payroll. Be certain to communicate with your payroll professional any and all bonuses given to employees, both in cash and non-cash form, to ensure that bonuses are reflected appropriately in your payroll and employee Forms W-2.
Another complexity of bonus payrolls is the tendency for companies to exceed their usual tax liability thresholds. When the federal tax liability in a payroll deposit period reaches $100,000 or more, employers are required to deposit the taxes to the IRS on the first business day following the check date. As this often falls outside their normal operating procedures, this change in tax payment schedule can often be overlooked, inadvertently causing penalties for late payment to be imposed by the IRS. Additionally, many payroll providers, including BenefitMall, require that funds for tax payments be wired in some circumstances. Because of the special nature of bonus payrolls and associated tax payments, it is important that you speak with your dedicated Payroll Specialist about any bonus payrolls well in advance.
BenefitMall has additional tools and other information that make paying bonuses easy on you, assist you in avoiding unexpected fees or penalties and help to ensure that your payroll information is accurate at year-end. Not a BenefitMall client? We can help! Contact us today to find out how we can make your payroll year-end easy and painless.
Don’t miss our previous year-end series post on how W-2 information verification can help to make your payroll year-end process easy and painless. And be sure to follow our blog for upcoming information about reporting third-party sick pay, the third post in this special year-end series.