When it comes to taxing bonuses, there are only two different methods: the percentage and the aggregate.
The percentage method is a flat 25% of anything supplemental to your employees' wages, i.e. bonuses. For example, if you give an employee a $5,000 bonus, $1,250 is taken out for taxes.
The aggregate method happens when you add a bonus to your employee’s most recent paycheck. Then, you must determine the withholding for both amounts, subtract what was deducted from his or her last check, and then withhold the rest from the bonus. All of this is based on the withholding tables for your state.
Now, these are the two ways to tax a bonus – but how many type of bonuses actually exist? See below:
- Current profit sharing: A very common approach to dishing out bonuses is the current profit sharing method. You set aside a preset amount of payroll dedicated for bonuses (on top of salaries). Whether or not an employee receives it depends on the profitability of your company.
- Gain sharing: These type of programs are usually used in the manufacturing industry. You pay out the bonus to your employee for statistical improvements.
- Spot bonus: Did one of your employees do something amazing that deserves recognition in the form on money right as it happens? Enter the spot bonus. Typically in smaller amounts – think $50 – these can be given by any supervisor or high-level management person.
- Non-cash bonus: Just as it sounds. This can include anything from a certificate, to a trophy, to a plaque that says “Employee of the Month.”
- Sign-on bonus: Popular in the athletic world, sign on bonuses are extra money given to someone who was just hired for a position. Usually it’s to establish goodwill or buy out a salary or deal from the previous employer.
- Mission bonus: Also referred to as “task bonuses”, these are given to teams of your employees for completing important projects. These bonuses are becoming popular in the tech industry, particularly in areas like Silicon Valley.
- Referral bonus: Need to hire the best talent? Trust your current employees? Referral bonuses are bonuses given to your employees who bring new, trustworthy workers into your company.
- Retention bonuses: Very rare, retention bonuses are given during acquisitions and mergers. These are given to encourage your employers to stay with the company if doubt of his or her employment should arise due to unusual circumstances.
- Holiday bonus: The most common you hear about, the holiday bonus is a cash or gift that’s given to your employees to celebrate the holidays. The amount or type of bonus is dictated by your company’s practices.
- Sales commission: Commission is money sales people receives off of their deals.
Want to never worry about taxing a bonus correctly again? Calculators by Symmetry
offers a calculator for both methods of taxation.