December 13, 2024
Would you be surprised to hear that the most popular time of the year for bonuses are during the winter holidays? Probably not! Bonuses are great for rewarding productivity, motivating continued exceptional performance, and to boost overall morale with your team by saying “thank you” for all they do.
It is important to understand that a bonus is still considered compensation, and therefore should be taxed as compensation to your employees. What this means for you as an employer is that you need to make sure you are reporting any bonus or incentive payouts made to your employees through your payroll processing. This will ensure it gets taxed appropriately, which helps make sure you can rightly claim it as a business deduction when tax time comes. If you paid bonuses to your employees outside of payroll, we recommend communicating with your payroll provider so accommodations can be made around the reporting and taxing before the year is over.
Since bonuses are considered a supplemental wage by the IRS they have a federal withholding tax flat rate of 22% and, depending on your state, there may be a separate flat rate for state income tax. We recommend reaching out to your payroll specialist for more details if needed.
Proactive and clear communication to your employees on how bonuses can be achieved, when they are paid, and how they will be reported on their W2 can avoid a lot of confusion or frustration. We recommend including these details in your company newsletters or handbooks so employees know ahead of time what to expect.
If Larson & Company is your payroll provider, please make sure to contact your payroll specialist before year end to communicate any bonuses or additional payments to your employees that may not have been reported through your regular payroll. They can help ensure those totals get reported appropriately. Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.