When your company has had a good year financially, it may behoove you to reward your employees with a bonus. You might also choose to reward high-performing employees with a year-end bonus for their efforts. With the help of accounting firms in Las Vegas, you can gain a clear understanding of how paying employee bonuses will affect your corporate or small business federal income tax returns.
What Constitutes a Bonus
The Internal Revenue Service (IRS) has a slim description of what qualifies as a bonus from employers to employees. The bonus must be a special one-time or annual payment from the employer to the employee for a special event or circumstance. The bonus is an additional payment beyond the employee's hourly or annual salary. Employees receiving a bonus could be part-time, full-time, contractual or freelance.
Deduction of Employee Bonuses on Federal Income Taxes
Bonus payments to employees are considered to be payments to employees. This makes them tax-deductible per IRS rules. If you do not plan to make bonuses an annual event year after year, it may be a good idea to qualify the bonus with the reason why you are paying it. If not all employees will receive a bonus, it is important to delineate why with a clear explanation. For example, you might state that employees who increased their sales by 5 percent over the previous calendar year got the bonus.
Bonus Payment Tax Implications to Employees
Bonuses paid to employees are taxable income. The taxes on the bonus are eligible for federal and state income taxes and FICA taxes. Any bonus amounts paid to your employees must also be factored into unemployment compensation rates, the Social Security maximum taxes and the additional Medicare taxes. You must pay your part of the FICA tax on the bonus as the employer. The bonus should be paid out as a regular paycheck to the employee.