How Should You Handle Bonus Pay?

When should you give it and how should you go about it?
By Courtney Cosby

Once your business is more firmly planted, you may start to wonder how to go about handling giving more money to your employees. One such way is to offer bonus pay.

Bonus pay is money given to an employee beyond his or her existing base wage and is considered a type of supplemental wage. It can be given as a gift or a reward. You may opt to give it to all employees or a select few. You also can determine how much you will give to each employee.

Bonus pay is not required but giving it can benefit your business. Showing appreciation to your employees can increase morale and increase productivity.

Types of Bonus Pay
There are two basic types of bonus pay: discretionary and non-discretionary. You as the employer get to determine when to award bonus compensation.

Discretionary bonuses are bonuses that employees do not expect and are given at random (at your discretion). If your team shows exceptional performance or your business is doing well overall, you can give a bonus to your employees.

Non-discretionary bonuses are bonuses that you have previously promised to your employees. Bonus compensation can be built into an employee’s contract, stating that, for example, you will give your employee a bonus when they reach a certain number of sales. You are legally liable to give non-discretionary bonuses to your employees if you promise them.

How to Pay a Bonus
When it comes to paying bonus wages, you have a few options. You can add the bonus to your employee’s wages, perhaps adding it on to a regular paycheck during an applicable pay period. You can also give a separate bonus check from the employee’s regular wages.

Taxes on Bonuses
Federal income taxes should be calculated on bonuses.

If you pay a bonus with regular wages but do not specify the amount, you will simply withhold federal income tax on the total wages like normal.

If you give a separate check for the bonus or combine pay with a paycheck but make a separate line to specify the amount, you can withhold federal income tax in a couple of ways. First, if you withheld income tax from the regular wages previously, you should withhold a flat 22% from the bonus.

If you pay supplemental wages with regular wages, add the supplemental wages to the regular wages and calculate the amount of income tax you will withhold on the combined wages. Subtract the tax withheld from the regular wages and withhold the remaining tax from the supplemental wages. This is also a good method to follow if you have not withheld federal income tax on the wages during the preceding or current calendar year.

Social Security tax, state income tax and Medicare tax also need to be withheld from bonus payments. Check with your state for a supplemental tax rate.