There are a number of reasons why a company might choose to issue bonuses to members of its workforce. Perhaps the business had a great year, revenue-wise, and wants to share some of its profits with the team. Maybe company leaders enjoy giving a little extra around the holidays. Regardless of the reason, it’s important to make sure your company always follows all legal requirements around bonus pay. This guide outlines how to issue bonuses to employees, along with information about the different types of bonuses.
What is a Bonus?
A bonus, or bonus pay, is money given to an employee in addition to that individual’s base wages. This supplemental pay can be given as a gift or reward to a specific individual or group of employees, or it may be issued in response to an employee’s exceptional efforts. Bonuses certainly aren’t required, but giving them can boost employee morale and increase satisfaction.
The two main types of bonuses include:
- Discretionary: Given at random, employees don’t expect them
- Non-discretionary: Often built into an employment contract, promised to an employee
Other reasons for giving bonuses, in addition to rewarding effort or celebrating a holiday, include:
- Work anniversaries
- Referrals (employee or customer)
- Achieving sales goals
- Splitting company profits
How to Pay a Bonus
An employer can choose to add bonus pay to an employee’s paycheck, simply increasing the amount they receive on a set payday. Another option is to run a separate bonus payroll, giving the employee an additional check that’s separate from their standard wages.
Tax Regulations around Bonus Pay
When issuing any type of supplemental pay, it’s important to adhere to the guidance outlined in IRS Publication 15. It provides details around payroll taxes and how they apply to bonus pay. All variable compensation is considered an employee benefit, which means it’s subject to FUTA (unemployment), Social Security, and Medicare taxes. Additional guidance around de minimis fringe benefits is available through the IRS as well.
Depending on how you structure the bonus payout, the amount may be taxed like normal compensation (when added to a paycheck) or taxed at the supplemental rate (when paid as a standalone check).
Considering taxes when determining bonus amounts is important, as a company could end up running a separate payroll and issuing checks for small amounts. For example, a $50 bonus could become a $39 check (with the 22% supplemental tax rate applied). It may not be worth the added time and expense to run a payroll for such a small payout amount, in which case it would make sense to add it to a pay period.
Each company’s bonus structure ultimately depends on its goals and workforce. Some companies issue bonuses regularly, while others stay away from supplemental pay. Before moving forward with giving employee bonuses, it’s smart to consult with a tax advisor or accountant to find out how doing so might impact the company and employee taxes.
This article is provided on an informational basis and does not constitute financial or legal advice.