Bonus Pay is an additional wage provided for employees as a reward. Bonus Pay falls under the supplemental wage category. Paid bonus amounts are taxable. The tax rate for bonus pay amounts can be calculated based on either W-4 withholdings or by using a flat supplemental rate, as recommended by the IRS.
In PayWow, bonus payments may be considered part of the regular payroll cycle or they can be run separately as a bonus payroll. If bonus pay is given as part of the regular payroll cycle, the tax rate may only be based on W-4 withholdings. If bonus payroll is run separately, the employer may choose either a rate based on W-4 withholdings or a flat supplemental rate.
Bonus Pay tax rate calculations:
Flat supplemental rate - Tax is deducted from the bonus amount at a flat rate of 22% for less than $1 million and 37% for more than $1 million.
Wage bracket method (W-4 Withholdings) - Tax is deducted from the bonus amount based on employees' W-4 withholdings.
Ways to provide bonus pay to employees:
(a) Run a Bonus Payroll
You can choose the method for calculating taxes on bonus pay amounts while running a bonus payroll.
If the tax withholding rate is the Supplemental Wage Rate, then you can choose either "Gross Earnings" or "Net Earnings." If using the W4 withholding rate, only "Gross Earnings" may be chosen to pay the bonus amount. Select "Net Earnings" when you want your employees to receive a certain amount as a bonus after tax deductions. PayWow will calculate the gross pay so that employees will receive the exact amount you want them to receive after tax deductions.
To learn more about running a Bonus Payroll in PayWow, click here.
(b) Run a Regular Payroll with Bonus
You can pay bonuses to employees along with regular payroll. Taxes are calculated using the Wage Bracket method.
To learn more about running bonus pay as part of Regular Payroll in PayWow, click here.