Thanksgiving is only a week away which means Christmas lights are up and Black Friday commercials are being displayed alongside everything red and green. I always love the Thanksgiving season. Autumn colors, sweaters and scarves, delicious food, and family time all make November feel so cozy. I hope we all take the time to appreciate the little things.
This is also the time of year where employers often give out yearend bonuses to show their appreciation for their employees!
When giving yearend bonuses, it is important to remember that these additional payments are not free and should still be considered payroll income. Because of this, Medicare and Social Security taxes, along with withholding rates based on the employee’s W-4, must be deducted from the bonus. However, you must give your employees the option to change their withholding authorization for paychecks that include bonuses.
You might consider using the “gross up” method when giving a bonus to an employee. This is where the tax amount needed is included in addition to the actual bonus. For example, if you wanted to give an employee a $300 bonus, then in their payroll you would record a deposit of $324.50, $300 for the bonus and $24.50 for the Medicare and Social Security expenses, not including withholding. These bonuses would also be included in the quarterly wage and tax reporting.
If you have any questions or would like help calculating bonuses for your employees, give us a call at Stapley Accounting, your QuickBooks and accounting professionals!