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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3004
Experience:  I've prepared all types of taxes since 1987.
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Do I need to withold the standard 25% federal witholding rate

Customer Question

Do I need to withold the standard 25% federal witholding rate if I pay a bonus, separate from my normal payroll? What if I include it in my normal payroll? Thank you.
Submitted: 5 years ago.
Category: Tax
Expert:  jheal303 replied 5 years ago.

Thanks for the question.

 

The most common practice is to withhold 25% for federal income tax from the gross bonus pay as this is considered a supplemental wages. Plus state income tax if applicable.

Thus for $1000 bonus you should withhold:

  • federal income tax 25% - $250
  • Social security - 6.2% - $62
  • Medicate tax - 1.45% - $14.5

You may, however, withhold federal income tax the same way as from regular wages based on W4 filing (single/married? number of allowances?). The choice - how to withhold - should be made by the employer and should be applied to all employees during the year - they may not withhold differently for different employers.

 

Bonus checks are subject to normal tax deductions, including state and federal taxes.

  • There is a federal supplemental wage rate of 25% for 2008 and 2009 Supplemental wages identified separately from regular wages... "withhold a flat 25% (no other percentage allowed).î Source - IRS Pub 15 (section 7 - Supplemental Wages).
  • Some states also have supplemental wage rates, if you are unsure of the state's individual requirements for the use of supplemental rates, please contact your tax/financial advisor or visit the IRS website at http://www.irs.gov/.
  • The net pay on a bonus check can drastically change based upon the selection and disbursal of taxes.

Options Available

  • You can calculate withholding taxes from a different pay schedule when creating the check (i.e., annually instead of weekly to reduce the amount of taxes withheld. To do this the employee record would need to be edited to change the pay frequency prior to creating the paycheck).
  • You can calculate withholding taxes from the supplemental tax rate and override the withholding amount on the paycheck (25% federal supplemental rate for tax yr. 2008 and 2009).

When you create a bonus check, you will need to select a payroll item that has been set up for that purpose. If you need to set up such a payroll item, see How do I set up a payroll item for a bonus?

.

  • Do I need to process the bonus checks with my normal payroll?
    Bonus checks can be processed with your normal payroll or in a separate payroll.
  • How are bonuses taxed?
    1. Bonus checks are subject to normal tax deductions, including state and federal taxes.
    2. You may want to process large bonuses separately from your normal payroll to reduce the tax impact on employees.
    3. There is a federal supplemental wage rate of 25% for 2008. Determine which tax rate you want to use before you process payroll.
    4. Some states also have supplemental wage rates.
    5. If you are unsure, contact your tax/financial advisor or visit the IRS website at http://www.irs.gov/

 

I hope this helps - Good Luck !

Customer: replied 5 years ago.
Hi.

A few questions:

So to sum up - per the IRS, you can treat the bonus as a supplemental wage or you can withold it based on the employee's normal witholding schedule for his regular wages?

Just want to see if it is legal for us to withold based on the employee's normal wage percentage?

You were stating the 25% is commonly used, but is it required by the IRS -will the company face any penalties?

Aren't bonuses considered "supplemental wages" and you are required by the IRS to withold the 25%?

Secondly, if we use an alternative from the 25%, do we need to pay it out in a separate payroll, separately from the normal salary/wage payroll for the month?

Customer: replied 5 years ago.
Hi.

A few questions.

You were stating that it is common to use the 25% w/h rate? If the bonuses are considered supplemental wages, is it legal for us to use the employees' witholding rate, instead of the 25%? Just want to make sure that the company is not faced with any penalties.

Second - if we can withold based on the employee's normal witholding rate, do we have to make the bonus a separate "bonus payroll", separate from the normal salary/wage payroll batch?

We currently use ADP as our payroll processor.
Thank you.
Expert:  jgordosea replied 5 years ago.

Greetings,

 

Bonuses are compensation that is subject to FICA and medicare just the same as regular wages; so those computations are the same for the bonus as for any other compensation.

 

Circular E http://www.irs.gov/pub/irs-pdf/p15.pdf has the instructions for employers. Section 7 has the rules for supplemental wages (which includes bonuses and commissions). See http://www.irs.gov/publications/p15/ar02.html#d0e1643

 

If you pay supplemental wages with regular wages withhold federal income tax as if the total were a single payment for a regular payroll period.

 

If you pay supplemental wages separately from regular wages add the supplemental and regular wages for the most recent payroll period this year. Then figure the income tax withholding as if the total was a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages.

 

Or, the employer can choose to withhold at a flat 25% on supplemental wages when paid separately or if separately identified on the same check as regular wages. This is common probably because it is easier to compute.

 

Either the flat 25% or withholding as described above is acceptable; but you can not treat the supplemental wages as a separate pay (and so only withhold on that amount). You must add them to regular wages of a pay period or compute the withholding as if the supplemental wage was a single payment with the prior pay period if a separate check is made.

 

I hope this information is useful to withhold income taxes from supplemental wages and bonuses.

 

Best regards.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3004
Experience: I've prepared all types of taxes since 1987.
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