How Does Tax on Bonuses Work? Your Questions Answered

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Did you know that there are over 600,000 new businesses across the United States each year? Unfortunately, many of these businesses fail to make it past the two-year mark.

There are many different nuances of running a business that people aren’t quite sure how to navigate at first.

One of the most common is how to handle tax on bonuses. This is crucial for small business owners to understand when handling their employee payroll obligations. Let’s take a brief look at everything you need to know.

Bonuses Are Considered Supplemental Income

Business owners need to treat bonuses as supplemental income when it comes to calculating payroll taxes. This is additional money that’s being paid out on top of an employee’s regular salary or hourly wages. As such, it’s subject to the same tax withholding rules as other forms of supplemental income.

How Does It Work?

The first thing you’ll need to do is calculate how much federal income tax needs to be withheld from the bonus.

You can do this by using the Supplemental Income Tax Withholding Rate Table from the IRS. This will provide insight into the exact numbers you need to hit.

What if an Employee Doesn’t Want to Have Taxes Withheld From Their Bonus?

If an employee doesn’t want to have taxes withheld from their bonus, they can fill out a new W-4 form.

This will allow them to indicate that they don’t want any taxes taken out of this additional income. However, it’s important to note that this means they may end up owing money come tax time.

What Are the Employer’s Responsibilities?

As the employer, you’re responsible for ensuring that the correct amount of taxes is withheld from bonuses. This means keeping up with the ever-changing tax laws and ensuring that your payroll system is updated accordingly.

Failing to do so could result in hefty fines from the IRS.

How Can I Make This Process Easier?

Outsourcing to a professional payroll service is one of the best ways to navigate this obligation.

When searching for someone to work with, many people overlook how important it is to check the professional’s past reputation. You will gain insight into what you can expect by checking what previous customers have had to say.

Take note of any consistencies in the reviews good or bad.

Additionally, you should only work with someone who has significant experience in the industry. It’s a risky maneuver to work with someone who is not established in their industry.

A great way to look into this is by booking a consultation. As you might guess, you should prioritize companies that work with people like you.

Another factor to consider is how they bill their clients. This can extensively help you plan your budget.

Lastly, how comfortable are you communicating with them? Only work with people who are willing to put your needs first.

Handling Tax on Bonuses Doesn’t Have to Be Difficult

Although understanding how to manage tax on bonuses might seem complicated at first, it isn’t as complex as most people believe.

Be sure that you keep the above information in mind so you can make the decision that is best for you. Want to learn more about what we can do? Be sure to reach out to us today and see how we can help you.

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Christina Hageny

President - Valor Payroll Solutions

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Christina Hageny

President - Valor Payroll Solutions

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