Implications of a Holiday Bonus

The holidays are almost here and if it’s been a good year for you then chances are you’re looking forward to a holiday bonus. But as wonderful as holiday bonuses are on principle, you should be aware that taxes can take a significant bite out of your bonus just like they do with your normal paychecks. Here’s the tax impacts you need to be aware of if you receive a holiday bonus.

Additional Taxes Due on Bonuses

Federal income tax: In most cases, the IRS requires 25% of the total amount paid to be withheld on supplemental income like bonuses. Depending on how the payroll is set up with your company, the bonus could be withheld at this rate or the same rate you use on your regular paychecks. Chances are that your actual tax rate could be lower so you’ll get some of this back when you file your tax return.
State and local income tax: In addition to federal income taxes, you may also owe state and county or city taxes.
Social Security tax: Both you and your employer must pay 6.2% on all compensation you earn up to $118,500 for 2016. If you earn more than $118,500 in wages for the year and your bonus accidentally pushes you over this threshold, or you changed jobs and the payroll department kept deducting extra Social Security tax, you can get the difference back when you file your tax return.
Medicare tax: Unlike Social Security tax, Medicare tax is a flat 1.45% with no cap. If your earnings are well past the Social Security cap, you still must pay this tax.

Did Your Employer Accidentally Issue You a 1099 When You Normally Receive a W-2?

If you are freelance or have your own business and a client who you regularly work with decides to give you a holiday bonus, or some extra pay any other time of the year, you simply include it with all of your other reportable business income. The client’s compensation to you plus the bonus should be included on your 1099 assuming the grand total paid throughout the year was $600 or more.
However, if you are an employee this can cause a headache at tax time if your employer doesn’t include your bonus on your W-2 and instead puts it on a 1099. If this happens, you need to file Form 8919. You’ll need to pay FICA and Medicare taxes on the payments but not the employer’s share as if you were freelance.
If your payroll provider issues you a second W-2 however, you have nothing to worry about. It will get reported all the same on your tax return.

Rue & Associates is happy to answer any questions and concerns you have about properly reporting holiday bonuses and preventing taxes from leaving you with a much smaller holiday gift than you thought you were going to get. Please give us a call today to speak to one of our friendly and professional tax law experts.