Year-end is when many companies like to offer employees "profit-sharing" or a bonus to share the company's successes or reward hard work. While it's an exciting time for employees, it must be business as usual for the accounting department. A few common questions always pop up each year surrounding bonuses. If you plan to issue them, read on to learn a few commonly unknown facts about year-end bonuses.
The most common mistake with bonuses is not putting them through payroll. Bonuses are taxable! You cannot just write employees a check and hand them out. Bonuses must be reported through the payroll system.
There is a methodology to allow for the distribution of manual checks if you wish to distribute them physically at a holiday party, for example, but payroll is still involved. Your accountant can take the amount of the bonus you want to issue and calculate the amount you can write on the check to the employee. Such calculations will ensure that wage deferrals and taxes are appropriately handled.
Your payroll software will likely default to a supplement federal tax rate of 22% on all bonus checks. Also, any 401(k) contributions the employee has set up will probably have to be deducted from the bonus run. However, you can manually override the withholding of benefit deductions, so you don't over-collect.
It is important to consider timing. If it is essential for you to get the bonus reported on your employee's 2022 Form W-2, you must give the data to your payroll company in enough time. Considering the last business day of 2022 is Friday, 30 December, this likely means Wednesday, the 28th, is the last day for processing any payrolls.
Finally, consider whether the amount of the bonus you intend to give is gross or net (i.e., take-home pay). For example, if you want to give your employee a $1,000 bonus, does that mean you want your employee to walk away with $1,000? If yes, the bonus you are really providing is something like $1,221.41. If, however, $1,000 is to be the gross amount of the compensation, your employee might only walk away with cash in their pocket of something like $834.29. Therefore, reaching out to your experienced accountant ahead of time is essential to plan and calculate the bonuses you intend to give.
If checks were distributed before any calculations were done, the payment amount must typically be treated as the de facto net amount. Unfortunately, this means the amount must be "grossed-up," incurring the employer unexpected costs.
If you need more help or have any questions regarding year-end bonuses, Szweda Consulting is here for you. Situated in Cleveland, we offer the best accounting services, from payroll to tax preparation, for businesses and nonprofits of all sizes. Contact us today or call us now at +1-216- 877-9015.