One of the most powerful ways to show appreciation to an employee: a bonus for their hard work.
Whether your company is going gangbusters because of their work, they’ve really been putting in extra effort, or even a strategy they were part of is taking off, paying a one-time bonus can bring the team together and help you show them how valuable they are.
What is a Bonus?
A bonus is a payment made on one occasion to an employee for a special reason – above and beyond their salary or hourly wages.
A company owner can decide if and who may receive a bonus, how much each person’s bonus is, and when it will be paid out. You can use a formula based on a salary level or a percentage of profit to set a bonus amount, or create a pool to pull all bonuses from and divide accordingly.
Sometimes bonuses may be part of a hiring contract, such as a sales role bonus for reaching a certain goal or an employment bonus for reaching a specific tenure with the company.
A Bonus as a Business Expense
A bonus to an employee is a tax-deductible business expense for any corporation because they are payroll expenses. If you wish to pay a bonus to a business owner, you should consult with your accountant to understand the deductibility of that payment.
Taxes for Employees
Employees will always pay taxes on their bonus, including federal and state income taxes, unemployment taxes, and social security and Medicare taxes. How you pay the bonus may have an impact on the level of taxes an employee pays. There are a few different options, depending on how the employment is structured:
- Employees who have taxes withheld from their regular paychecks: bonus paid as part of their regular pay. To calculate this bonus and related taxes, add the bonus amount to the employee’s paycheck and then use that total amount as you calculate federal and state income tax withholding.
- Employees who have taxes withheld from their regular paychecks: bonus paid as a separate check. To calculate this, you would use a 22 percent tax bracket, and include the regular FICA taxes and state income taxes from this check.
Because tax rates vary, either of these methods might change the net amount the employee takes home from the bonus. Some employees may ask you to estimate the take home amount in these different ways to see which leaves more deposited into their bank account.
If you give your employees a bonus, you need to give them the opportunity to change their withholding authorizations for that particular paycheck, and then change it again for subsequent paychecks if they’d like. Employees might like to change the withholding to receive a higher amount of the bonus – though regardless, they have to pay taxes on it, it’s simply a matter of deferring some until later during tax season.
Regardless of how you pay the employee, as the employer, you are responsible to pay the employer part of FICA taxes and report the bonus on Form 941, the quarterly wage and tax report to the IRS.
Bonuses and Overtime Pay
Depending on the type of bonus, it can have an impact on overtime calculations.
If a bonus is discretionary – unexpected, given at random for performance or goals met – it does not have an impact on overtime pay calculations.
A non-discretionary bonus is one that the employer must pay because of agreed-upon terms, such as an employment contract or a bonus an employee expects (with the exception of holiday bonuses). A signing bonus is also non-discretionary.
If an employee is eligible for overtime – an hourly employee or an exempt employee who can receive overtime per their employment status – the non-discretionary bonus must be added to their weekly gross pay for overtime purposes.