I've would like to give my employees bonuses this year. How do I tax the bonuses? Does the employee pay?

Question

What is the best way to do this (do I give the employees a check made out to "cash"") How do I still get a tax deduction for this. How do most small businesses do this?

Answer 1

Like Wayne said, bonuses are treated as supplemental wages. It gets reported as compensation on the W-2. However, rather than applying the normal withholding tables to figure out the tax withholding, you have to use the flat rate tax withholding percentages that apply to supplemental wages. For federal, this would be 26%. For state, the percentage will vary by state. If your employee is fairly highly compensated, their marginal tax rates may be higher than 26%. In this case, they would need to pay additional tax at the end of the year when they file their return.

Answer 2

The best way to handle this is through your payroll system. If you want the bonus to have the most impact, make it a separate check. The employees will remember and appreciate it more. You can withhold taxes for Federal and State if you desire (it is better for your employees if you do-they don't have to come up with extra money for the tax when they file). Do not make the checks payable to "Cash". The amount you give to each employee must be added to the W-2. Running the payments through payroll will take care of all this for you.

For your business, the bonus amounts would be treated just like salary or wages, which are deductible expenses for the company. You will have to pay FICA and medicare taxes (which are also deductible expenses) on the bonus amounts. The employee portions should be withheld from the checks.

Answer 3

You can treat it like normal pay. Most big companies treat it for withholding purposes as if the employee made that amount for the whole year and include it in a paycheck. This has the disadvantage of increasing the withholding, so the employee gets less net(although they get it back when they get their refund).

Answer 4

Some companies put a bonus on a 1099. The employees is than considered partially self employed and can deduct some expenses from it on a Sch C.

Answer 5

By giving them a check made out to cash, you are assuming responsibility for the taxes. You have to account for the money you pay out. Most employers simply tax the bonus as any other income, it is easier. Tax has to be paid on the money, who pays it
will be determined on how you pay them. If you give them cash are they going to declear it?

Answer 6

Bonuses are considered "Supplemental Wages". Run them through payroll like normal.