The end of the year is quickly approaching and there are some things you need to be aware of so that you can be compliant with the laws regarding year-end bonuses.
Many employers like to give bonuses to employees at the end of the year. There are a few guidelines to follow when giving the bonus to make sure you are following the taxability rules. According to the IRS, the following determines if it is taxable:
A. Is it cash? If you are paying a bonus in cash, it is subject to all regular payroll taxes. If you choose to give the employee the full amount of the bonus, you as the employer are responsible for paying the taxes due (both the employee and employer portions.) Make sure this amount is reported to the payroll company with the method you want to use (bonus paid in full, or taxes removed) to make sure taxes are calculated properly (and the employee is paid the correct net amount.)
B. Is it an item? If the gift you are giving has a low fair market value and is given infrequently, it is not subject to payroll taxes, nor included in wages. A once-a-year gift is considered not routine (although done each year), so falls under this guideline. Please note that gift cards are considered cash, so doesn’t fall into this category.
If you are going to give a cash bonus, don’t make the mistake of writing it out yourself and not withholding the taxes. You must process it through payroll.
More information on this topic can be found on the following IRS links: http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf (look for De Minimin Fringe Benefits on page 15) and http://www.irs.gov/pub/irs-pdf/p15.pdf (look for the heading Supplemental Wages on page 15).
I hope this information has been helpful to you.
Candy
