Getting a year end Bonus? Defer tax & keep more in your pocket!
It is a common practice for employers to issue bonuses to motivate or are christmas bonuses taxed employees.
A bonus is basically extra money in excess of what an employee normally receives.
When employers decide to award bonus pay, they must decide whether to add it to payroll checks or issue the extra compensation as a separate payment.
Either approach complies with government rules, so an employer can choose based on its specific circumstances.
The Internal Revenue Service requires withholding taxes for separate bonus payments be calculated according to special rules.
Employee Bonus Overview A bonus is defined as any compensation in addition to what an employee would normally receive, such as salary or wages.
Organizations pay bonuses to executives and employees, and sometimes to new hires as inducement to join. what are the best ways to make money online the qualified people.
They may also be a reward for good job performance or an incentive grand villa casino slots achieve a specific goal, like successfully completing a project on time.
The IRS considers bonus payments a form of supplementary income.
In general, supplementary income is money paid in addition to regular wages such as commissions, severance pay or back pay.
Employers have the option of issuing bonuses as separate payments using the percentage method and special bonus tax rates.
Alternatively, a bonus can be added to regular paychecks using the aggregate method.
Percentage Method: The Bonus Tax Rate An employer may decide to issue a bonus on grand villa casino slots separate check using the percentage method.
The employer must calculate and deduct all payroll are christmas bonuses taxed, including federal income tax, Social Security tax, Medicare tax and any applicable state and local taxes.
However, the federal income tax rate on bonuses is a please click for source 22 percent of the gross amount for most people.
The Social Security tax rate is 6.
The Medicare tax of 1.
This amount may be reduced if state or local taxes also apply.
Aggregate Method: One Check Payroll An employer may decide upon adding bonus payments to paychecks and, therefore, use a one check payroll.
The IRS calls this the aggregate method, and does not require the bonus tax rates.
Payroll taxes are calculated on the entire amount in the same manner used when only regular wages are paid.
This employee is in the 12 percent tax bracket.
Aggregate Bonus Payments Because there is no legal or regulatory requirement to pay bonuses separately or aggregated with other compensation, a business is free to base the decision on its own situation.
At first glance, it may seem simplest to add bonus money to employees' regular paychecks, rather than go to the trouble of processing additional payments.
However, modern payroll software makes processing the extra set of paychecks relatively simple.
In addition, keeping bonus payments separate can help managers track expenses and ensure that bonuses are credited to the correct accounts.
Another consideration is the impact on employees.
Because of the flat rate used for separate payments, using this method may cause employees with high salaries to have too little tax withheld, resulting in a tax liability when the employee files his tax return.
Conversely, an employee in a low tax bracket may get a larger refund because too much tax was taken out.
However, there is no net difference in the amount the employee eventually pays, because grand villa casino slots earnings will be aggregated together on his tax return in any case.
About the Author Based in Atlanta, Georgia, William Adkins has been writing professionally since 2008.
He writes about small business, finance and economics issues for publishers like Chron Small Business and Bizfluent.
Adkins holds master's degrees in history of business and labor and in sociology from Georgia State University.
He became a member of the Society of Professional Journalists in 2009.
Should Bonuses Be Separate or Come in Payroll Checks?
Small Business - Chron.
Bill for higher tax exemption on bonuses passes House panel
How are bonuses taxed when you file? Beyond the impact on your take-home pay, a bonus could bump your total taxable income into a higher bracket for the year. As a result, the amount of your.
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