Taxation on bonuses
Moms View Message Board: General Discussion Archive: Archive February 2005:
Taxation on bonuses
Some of you ladies wondered how bonuses were taxed.
Circular E from the Internal Revenue Service has strict laws regarding taxes on these items.
Sorry, I have done taxes for almost 19 years. Thought you should be informed.
If you need any other information, go to Internal Revenue Service Website, type in Circular E and it explains how wages and other compensation are taxed.
". Supplemental Wages
Supplemental wages are compensation paid in addition to an employee's regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental payments depends on whether the supplemental payment is identified as a separate payment from regular wages.
Supplemental wages combined with regular wages. If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.
Supplemental wages identified separately from regular wages. If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. However, separate rules apply to the extent the supplemental wages paid to any one employee during the year exceed $1,000,000. The American Jobs Creation Act of 2004 provides that if a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year exceeds $1,000,000, the excess will be subject to withholding at 35 percent (or the highest rate of income tax for the year). This provision is effective with respect to payments made after December 31, 2004. The Internal Revenue Service will be providing guidance about this provision in the near future.
If you withheld income tax from an employee's regular wages, you can use one of the following methods for the supplemental wages.
Withhold a flat 25% (no other percentage allowed).
Add the supplemental and regular wages for the most recent payroll period this year. Then figure the income tax withholding as if the total was a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages.
If you did not withhold income tax from the employee's regular wages, use method 1-b above. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages.
Regardless of the method that you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes."
YOU SHOULD MAKE NOTE (not yelling)
This is federal withholding tax only, you have to add in Social Security, Medicare, State and Local taxes if they apply. In PA these additional taxes would be 11.65% + 25% total of 36.65%. I live in rural PA. All state and municipalities are different.
Just to give you something to think about.
I don't know what other employers do, but every employer I've worked for takes all the appropriate taxes on any bonus check and includes the bonus in my W-2.
Ginny, I should have made a note that this was in regard to the post about what you are going to do with your tax refund.
Some of the ladies wondered why so much tax was taken off bonus checks.
Bonus checks or commission checks are sometimes paid separate in some businesses.
Dh worked for a lawn service company and his bonus checks were a part of his weekly paycheck. On the other hand, some bonuses are separated from regular paychecks.
My CPA has me first take the taxes out of the bonus check for my employee, as well, and then I include the bonus on the W-2's as Ginny mentioned.
This is the policy across the board for the rest of my colleagues across the country.
Thanks for the info Marg. Dh's bonus is a completely seperate check, I guess, that is why it is taxed so high(40%). We also had moving expenses on our tax return. We usually get a refund because of his bonus. It was even more this year because of our moving expenses.
I dont have any federal taxes taken out of my dh check because that one bonus check takes out more than our yearly federal tax liability. Sigh.
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