![]() Add the bonus amount to their regular wages and calculate the tax withholding on the combined amount based on their W-4 (or the withholding tables included in IRS Publication 15-T).This might be the case if your employee claims a high level of adjustments or an exemption from income tax withholding on their W-4. You’re required to use it if you haven’t withheld taxes from the employee’s pay before. The aggregate method is more complicated. No other percentage is allowed if you use the flat rate method, and you can only use it if you withheld tax from the employee’s wages in the current or prior year. You would withhold $220 from their bonus ($1,000 x 22 percent) plus the regular withholdings from their normal paycheck. For example, say you’re giving your employee a $1,000 bonus. The flat rate method, also known as the flat percentage method, requires you to withhold income tax at a flat 22 percent rate. This method usually makes sense for smaller bonuses and overtime pay because they typically don’t move the employee into a higher tax bracket. You would withhold $300 from their $3,000 paycheck ($3,000 x 10 percent). You normally withhold tax at a rate of 10 percent. You can only use this method if supplemental wages are paid with regular wages and not identified separately on the employee’s pay stub.įor example, say you’re giving your employee a $1,000 bonus along with their $2,000 of regular wages. Most small businesses pay employees supplemental wages of $1 million or less. For 2023, the highest tax bracket is 37 percent. But any that do must withhold tax at the highest tax rate for any supplemental wages over that threshold. Supplemental Wages Over $1 Millionįew small business owners pay supplemental wages greater than $1 million to employees. That withholding rate depends on how much the employee earns. In some circumstances, the IRS requires employers to withhold federal income taxes from supplemental wages at a higher rate than they would withhold from normal wages. The IRS considers bonuses to be “supplemental wages.” Supplemental wages are payments made to employees outside of their regular wages, including overtime, bonuses, commissions, accumulated sick pay, severance pay, and more. While employee bonuses can be a great way to reward employees and boost morale, it’s important to understand the unique tax rules that apply. ![]() They say cash is king, and that’s never more true than when employers want to reward their team for a job well done.Īccording to the Society for Human Resource Management, 37 percent of employees prefer a cash bonus from their employer during the holidays over a gift (6 percent), an in-person or virtual party (1 percent), job security (35 percent), or an annual merit increase (21 percent).
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