If you are having trouble figuring out how to calculate end of year bonuses you are not alone! Here are some quick tips:
Holiday Bonus (cash or gift cards)
You must treat all cash bonuses, including Gift Certificates (“cash in kind”) as taxable wages, no matter how small they are. You can add a Bonus line item on the employee’s paycheck or create a separate payment just for the bonus.
Grossing up a Net Bonus check
Many employers want to give their employees a “net amount bonus” check or a set dollar amount. In order to do this you will need to “gross up” or increase the net check by the amount of taxes that need to be withheld. Although the bonus checks are subject to ALL taxes, many employers choose not to withhold Federal Withholding or State Withholding taxes. Here is how you “gross up” a net bonus check to withhold FICA only:
Ie: Net Bonus check will be $500.00
SS @ 6.2% and Med @1.45% = 7.65%
100% – 7.65% = 92.35%
$500 divided by 92.35% = $541.42
Your Gross paycheck would be entered as $541.42. FICA amounts = $41.42 Employer FICA match is also $41.42. The total cost to the employer for a net bonus check of $500.00 would be $582.84 (not including unemployment insurance).
Nontaxable gifts include fruit baskets, hams, turkeys, wine, flowers and entertainment tickets to a show or sporting event (does not include season tickets). These items are considered de minimis and are non-taxable fringe benefits if they are nominal in value and given infrequently. You can book these expense items as “Employee Fringe Benefits” in your accounting software.
Holiday Parties or Picnics
The cost of an office or company party is fully deductible to the business at 100% unlike the 50% meals and entertainment deduction. This is non-taxable to the employee and their families as a de minimis fringe benefit. These parties should be infrequent and given to promote health, goodwill, contentment and efficiency of employees.
Happy Bonus giving and Holiday Season!!