What You Need to Know About Year-End Bonuses for Payroll

If your company is considering giving year-end bonuses to reward your employees for their commitment and hard work, be sure you handle the paperwork properly in payroll. Otherwise, your gift may turn into a headache for you and your employees.

 

When drawing up the bonus checks, you still need to take out normal tax deductions for both state and federal taxes. You use the supplemental wage rate of 25 percent for these deductions, not the typical wage deductions. If the supplemental wages are more than $1 million, the rate is 39.6 percent. These rates are subject to change based on tax code, so make sure your payroll professional is up to date.

 

Discretionary and Nondiscretionary Bonuses: Know the Difference

 

There are two types of bonus payments: discretionary and nondiscretionary. Discretionary bonuses are those an employee doesn’t have a reason to expect. It can’t be required by a contract, agreement or promise. A non-discretionary bonus is one that is promised or expected, and can be based on the quality or efficiency of work, on the number of hours worked or something similar.

 

The main difference between these two types is that non-discretionary bonuses must be included when determining overtime pay. That means such a year-end bonus must be apportioned into the work weeks when the employee earned it. This may require you to recalculate overtime pay for an employee in the time periods it was earned.

 

Since discretionary bonuses are at the sole discretion of the employer and not based on additional work, they are not included in overtime calculations.

 

There are additional ways to calculate year-end bonuses if a non-discretionary bonus can’t be attributed to any particular work weeks. If you have questions about how to process payroll for year-end bonuses, contact Sequoia Personnel Services Inc. and we can help.

 The information provided in this blog is intended for general information purposes only. Readers should seek the help of an HR professional for guidance on specific issues.