Bonus vs. Payroll Tax
Bonus taxes are the federal and state taxes that you withhold from employees’ bonus checks. Payroll taxes are the federal and state taxes that you withhold from employees’ normal wages. Bonuses, also called supplemental wages, are not regular wages. Sometimes, however, bonuses may be taxed as regular wages.
Regular wages and bonuses are subject to federal income tax. To figure withholding on regular wages, obtain the employee’s filing status and number of allowances respectively from lines 3 and 5 of her W-4 form. Then, find the Internal Revenue Service Circular E tax table that matches the W-4, the employee’s wages and pay period; the table gives the withholding amount. As of publication, you are required to withhold federal income tax on bonuses at a flat 25 percent if the bonus is paid as a separate check from regular wages. If bonus is paid on the same check as regular wages, withhold federal income tax as though it were a sole payment on regular payroll.
Federal Insurance Contributions Act taxes include Social Security and Medicare taxes. Bonuses and regular wages are taxed at the same FICA rates. As of publication, you are to withhold Social Security tax at 4.2 percent of taxable wages up to the annual wage maximum of $110,100 and Medicare tax at 1.45 percent of taxable wages. Bonuses are included in employees’ gross wages; therefore, consider bonuses when calculating the annual wage limit for employees. For example, if an employee earns annual salary of $100,000 and receives $25,000 in bonuses, Social Security tax would apply to $110,100 of that. Get FICA tax and federal income tax rates from IRS Circular E.
If applicable, use the state or local revenue agency’s guidelines for withholding state and local income tax from employees’ regular wages. You might be required to withhold according to the employee’s state and local tax forms and the state and local tax-withholding tables, or according to flat percentages of taxable wages. For bonuses, the state and local governments might require a flat withholding percentage or use the same method as for calculating regular wages. The latter case is called the aggregate method.
Taxable wages are an employee’s earnings after subtracting applicable pretax deductions, such as health, life and disability insurance, and 401(k) contributions. Specifically, if an employee has a pretax deduction, regular payroll tax is based on her wages after you subtract the benefit from her gross wages. If a bonus is paid on the same check as regular wages, deduct the pretax benefit from the combined payment before you withhold taxes. If a bonus is paid as a separate check, withhold pretax deductions from the employee’s regular paycheck only; depending on your plan document, there might be an exception to this rule. For example, the plan document might allow 401(k) deductions from bonuses. If necessary, consult a tax adviser or your plan administrator for clarification on deductions from bonuses.