Bonus Deductions

Dear, Anita,

I just got a year-end holiday bonus check and I’m grateful, but confused. The amount taken out for taxes seems way too high. It seems to be a greater percentage than my usual paycheck deductions. What’s up with that?

Dear, Bob Cratchitt,money

Oh, joy! Oh… wait! I hear this concern about bonus checks often. Uncle Scrooge… excuse me, Uncle Sam may be to blame. The IRS views bonuses (as well as commissions, overtime, even things like employer-paid moving expenses) as “supplemental wages.” Employers may use either a flat 25% withholding rate or an aggregate method. The aggregate method combines the bonus amount with the most recent regular wage paycheck. Then, the normal withholding amount based on IRS tables is determined for the total of both amounts. Your payroll department subtracts what was already withheld from your last paycheck and withholds the rest from the bonus amount.

The aggregate method, while more cumbersome, is actually the more accurate method of determining your actual tax liability. Pay now or pay later – April 15th, to be exact. (Not-so-fun fact: the average American works the first 111 days of the year – or to just past Tax Day – to pay their taxes.) The good news is that if the withholding at the higher rate was actually too much, you’ll be refunded when you file your tax returns.

Man doing his accounting, financial adviser workingSpecial rules apply to bonuses of $1 million or more (don’t you wish you had that “problem?”), and they are bumped into the 39.6% withholding rate.

Before you go out to spend your anticipated bonus, use the AmCheck Flat-Rate or Aggregate Bonus Calculator. Remember, in addition to the federal taxes, bonuses are also subject to withholding for Social Security, Medicare, and any state and local taxes.

Readers: Did you get a holiday or year-end bonus this year? What are your plans for the windfall?

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Holiday Parties, Payouts, and Perks

Dear, Anita,

Our company of about 80 employees is re-thinking hosting a holiday party this year. It is a big expense, takes lots of planning, and I don’t know if it is really means that much to the employees or if another gift or bonus would be more appreciated. What do you suggest?

Dear, Don’t Want to be a Scrooge,

Before spending any money on fringe benefits, you’ll want to deliberate thoughtfully because you could be setting a precedent for years to come. Determine if this holiday perk is something that can be measured, i.e. employees get a bonus/gift card/Christmas party because you achieved an annual sales goal/reduced costs/achieved a milestone. Or is it simply a token of holiday cheer?

Holiday GiftWhat do employees want? Glassdoor, a career website where employees anonymously rate their companies, has conducted an annual survey in years past that includes employer holiday perks. Nearly three in four employees said, basically, “Show me the money,”  preferring a cash bonus, followed by the options of salary raises, more paid time off, grocery gift cards, working from home, company stock, health care subsidies, and gym memberships. Holiday parties – even with an open bar – continue to be one of the least popular perks.

BONUSES. Let’s look at the most popular reward. If you decide to go the holiday bonus route, will there be different levels for employment tiers? If the amount will vary year-to-year because it is based on a goal number or yearly profit amount, be sure to communicate that to employees. You don’t want to have a disgruntled worker next year when their bonus is not as much because company profits plunge. Remember, also, to let employees know that taxes will be deducted. (Thanks Uncle Sam, aka “The Grinch!”) If you’re feeling especially generous, you can “gross up” the bonus and give each employee more to allow for withholding, so that their actual check is a nice round number.

GIFTS. Holiday gifts are a broad category; one size does not fit all. While some co-workers may enjoy a bottle of wine, the gift could offend a teetotaler.  Employees may not be thrilled to get a lovely gift item with your company’s logo emblazoned on it. I know, you’re trying to take the expense out of the marketing budget, but it could come off as tacky. Gift cards – whether to a favorite local restaurant or department store, or a universal card that works at any store – are a nice way to show appreciation to employees at the holidays. (Check with your tax guru about whether gift card amounts are taxable.)

PARTIES. The office party can be looked upon with eager anticipation or with dread. Some companies with deep pockets throw incredible bashes. I’m going to go out on an evergreen limb and say that a party should not be a substitute for a bonus. Hard-working employees may resent every decoration and each platter of shrimp cocktail, when the money spent could have been dispersed to every cog in the company machine. Since you’ve thrown parties in the past, if you do decide to give bonuses or gifts instead this year, you could still suggest an office potluck or cookie exchange event. This will satisfy the social butterflies in your company who actually looked forward to the office Christmas party.

For employees, if your company does have a Christmas party, don’t be “that guy!” For tips on how to behave at the office parties at the holidays or any time of the year check out my post, Celebrate the Smart Way, and  this YouTube video from across the pond:

Readers: What is the most unusual or appreciated holiday gift you’ve received from an employer?

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Anita Clew's blog posts are intended for general guidance and should never be taken as legal advice. In all instances where harassment, inequity, or unfair treatment is believed to be present, please consult your HR Department or legal representation.
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