It’s that time of year again where employees often receive year-end bonuses. If you will be one of the employers giving a bonus to your employee(s), please be aware of the rules regarding the taxability of these payments.
The IRS establishes which payments are subject to payroll taxes and the state rules generally follow federal regulations. According to federal law, the following determines if it is taxable:
- If you are paying a bonus in cash, it is subject to all regular payroll taxes. If you choose to give the employee the full amount of the bonus without deducting mandatory withholdings, you as the employer are responsible to pay the taxes due (both the employee and employer portions.) You’ll want to clarify with your payroll company the method you want to use (bonus paid in full, or taxes removed) to make sure taxes are calculated properly (and the employee is paid the correct net amount.)
- If the gift you are giving is not cash, has a low fair market value, and is given infrequently, it is not included in wages, nor subject to payroll taxes. A once a year item given as a bonus is not considered routine (although done each year), so it qualifies under this guideline. Please note that gift cards are considered cash, so they are not considered an item and are subject to all payroll taxes.
Please note if the bonus given is considered wages, it will need to be processed through payroll to properly deduct all withholdings. A check written directly from you is not allowed.
Have more questions regarding this topic? Feel free to reach out to me or my staff at 310-534-5577 or firstname.lastname@example.org. We are here to help!