Finance Blog
Year-End Bonuses: Are They Taxable?
Year-End Bonuses: Are They Taxable?
The first year-end bonus I ever got was a $25 gift certificate to the local supermarket. The best bonus I ever got was a car, $100 cash, and a box of chocolates.
Alas, the 260Z was made by Tonka. But that C-note was one whole week’s wages—after only a month on the job! What a wonderful boss.
Don’t you love getting bonuses? Bosses love to give them, too. Unfortunately, from the bookkeeping I’ve seen, bosses don’t know how to report the bonuses on their books.
Bonuses Are Payroll
Large corporations with hundreds or thousands of employees have entire payroll departments that keep up with the laws. They get it right.
It’s the small employers who tend to write separate bonus checks without including them in the payroll system. Naturally, when tax time arrives, their tax professionals go ballistic.
The Internal Revenue Code Section 3402 holds employers responsible for all the taxes that should have been on that check. Beware—if the IRS or the state payroll department audits the company, it will assess taxes on all those bonuses.
Employees who receive bonuses that are not included in payroll must report the bonus as income. They must pay self-employment taxes. Using Form 8919 will exempt the employee from having to pay the employer’s share of the Social Security and Medicare taxes. However, this turns the employer in to the IRS. Most employees won’t do this, since they want to keep their jobs and continue to get bonus checks.
Which Bonuses Are Not Taxable?
If you’re an employer, there are ways to show your employees you value their work without forcing them to pay taxes on a bonus.
Thirty-plus years since my first bonus, deductible gifts are still limited to $25. Gift cards are still tax-free, as are gift baskets and such.
Certain employee awards are not taxable to the employees—but are fully deductible to the employer. The award is limited to $400 per employee, and $1,600 total per employer. Employees may receive such an award for safety achievement or length of service once every five years.
Plaques and framed certificates are comparatively cheap but speak volumes. Employees can display them at home or work—and include the awards in their résumés.
Another way to recognize special employees is to feature them in the company newsletter. It can be a huge ego boost. If your company doesn’t have a newsletter, the holidays are a good time to publish one. Highlight employees instrumental to the company’s success. Seek out and celebrate the unsung hero who quietly and consistently gets work done, without complaint, making everyone else look good.
For all your employees, throw a party someplace terrific, where they could not normally afford to go. Encourage staff to bring a companion. Or make the annual party an evening at an amusement park or a major tourist attraction. In Southern California, I’ve enjoyed year-end parties at Disneyland, the Queen Mary, and Knott’s Berry Farm.
In Good Times…and Bad
When times are bad and company coffers are low, it is, counter intuitively, the best time to provide bonuses. The staff has probably worked extra hard during the past year to keep the company afloat. Find a way to express your gratitude—whether through financial rewards or plaques or framed certificates.
Just because the year-end bonus is taxable is no reason not to make it as large and generous as possible. The larger the check, the more money is left over after taxes. When an employee has done a great job, make him or her feel appreciated. Money says it best.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.
Read More:
Tax Schemes and Tax Turkeys: Stay Away from Too-Good-to-Be-True Tax Advice
Winner! Winner! Winner!: Tax Implications of Winning Lotteries and Game Show Prizes
New Tax Laws for 2011
Open-Enrollment and FSAs: A Bonanza of Tax Advantages
No comments yet
We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.
Some other factors to consider when commenting:
- Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
- All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
- We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
- Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
- Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
- Stay on topic. Your comment should be concise and pertain to the specific post in question.
- Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
- Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.
RSS Feeds