Each year many companies reward employees with bonuses for their hard work. This reward is in addition to expected yearly wages and is handed out as either cash or non-cash. Regardless of what the bonus is, employers must withhold income taxes. To help you ease your way into the New Year with less stress than necessary, take a look at the bonus payment tips below for information on year-end tax preparations.
1. Coordinate Payroll Schedules – Make sure your payroll is run in chronological order. Specifically, don’t run a payroll with a check date that comes before a payroll with a check date that has already been processed. Some payroll companies require payroll to be handled this way, but even more so, this significantly helps with year-end organization. Also, run your bonus payroll on a separate day than your regularly scheduled payroll so that two payrolls are not being processed on the same day.
2. Employee Tax Brackets – Consider the employee’s tax bracket when giving bonuses. There are various formulas to choose from:
Percentage Method Bonus Calculator – Calculates federal withholdings using a 25 percent rate for bonuses paid up to one million dollars, and a 35 percent rate for bonuses paid in amounts more than one million dollars.
Aggregate Method Bonus Calculator – This method calculates bonuses as a part of standard payroll. While the employee may have more money withheld initially using this formula, more will be returned during tax season.
Gross Pay Calculator – The employee receives the full bonus pay. The gross amount of the bonus is determined using the calculator and then the tax is added to the net pay.
Be sure to account for all local, state and federal taxes regardless of what formula is used. And equally important, make sure bonus pay is included in your payroll and W-2s.
3. Federal Tax Liability Threshold - To avoid penalties, be sure to account for the tax liability threshold. Employers should report and deposit taxes of payroll deposit periods that meet or exceed $100,000 to the IRS on the first business day after the check date.
As you continue to prepare for the end of the year and the start of 2015, we hope that you find these tax tips helpful. BenefitMall understands how much time and energy is put into handling year-end payroll tasks. To make sure your company remains compliant with standard tax regulations, please contact your BenefitMall Payroll Specialist.