Employee Bonuses: Options and Types
Your company has had a great year and in no small part, it’s due to the hard work of your employees. You’d like to show them how much you appreciate their efforts and successes. With year end fast approaching, the topic of employee bonuses is finding its way into more conversations regarding compensation. How does handing out bonuses impact you, as the employer and how does it impact your crew? What do you need to know?
A very important piece to implementing a bonus plan is making sure you’re staying inside the legal lines. Before moving forward with a plan, bring your idea to a local attorney, as every state and legal structure provides different options and boundaries.
First, there are different types of bonus programs. We’ll look at just a few. Profit sharing gives employees a certain share of the company’s profits. Typically, they are paid out quarterly or annually, based on the company’s earnings. If the company is doing well, everyone gets a big slice of the pie; in off years, not so much. Profit sharing is a great way to give employees a sense of ownership and incentive to build up the bottom line. There are different ways to structure profit sharing plans, and your tax professional can point you in the best direction.
Gainsharing is another way employees can benefit from taking ownership of their success. A team or single employee shares the amount saved—or gained—by the business when a suggestion proves profitable. Gainsharing is based on the premise that those in the trenches who create innovative and cost-savings solutions and processes should benefit from those successes and receive a percentage of the gain. Manufacturing facilities typically employ these type of plans.
Spot Bonus Awards
Has an employee done something that deserves instant recognition? Bam! That person may deserve an instantaneous bonus. Spot bonus awards are easy-to-set-up incentives that pay out about $50 on the spot when an employee has done something above and beyond his or her job description.
End-of-year holiday bonuses are ubiquitous in many business environments. They can range from cash bonuses to gift cards to a bottle of wine and anything in between. The holiday bonus isn’t typically tied to performance as other types of bonuses are. Think of commissions and profit and gain sharing, or even a referral bonus when an employee recruits talent, resulting in a new hire.
Now comes the trickier part: the IRS considers bonuses “supplemental wages” and as such are subject to higher tax rates than a regular paycheck. Much to your employees’ dismay, they may find that their bonus check is half what they expected. In addition to the payroll deductions they are accustomed to (withholding allowances, FICA, Social Security and Medicare, state and local income tax), bonus taxes are also taken out of the gross amount.
Calculating Taxes for Employee Bonuses
There are several recommended methods to calculate the bonus tax rate. One is to simply withhold a flat 25% federal income tax rate on the bonus pay. Just make sure to talk with your Journey Payroll Specialist about this option.
The Aggregate Method is a little more work, because the bonus wages are in addition to the regular wages. Take this total, the employee’s number of personal allowances, and Publication 15 to determine the total withholding amount. Locate the the tax amount for the regular wages in Publication 15. Subtract the withholding taxes from the regular wages. The difference is the bonus tax amount, and from that total, the bonus pay withholding is calculated.
For employees earning more than $1 million in supplemental wages in a calendar year, there are specific rules that need to be adhered to. The taxes for these supplemental wages are 39.6% for federal taxes along with standard withholdings as outlined above.
Contact your Journey Payroll Specialist when you’re ready to run your bonuses!