How to Document Cash Bonuses

Figure and document cash bonuses carefully in payroll records.

When you wish to reward an employee with a cash bonus, you must record the bonus properly in your payroll records. Because they are subject to income tax, document cash bonuses accurately so the correct deductions occur and so employees' W-2 forms reflect the correct tax figures for annual earnings. With careful record keeping, you can reward employees and ensure proper tax withholding.

Instructions

1. Determine the withholding amount on the cash bonus for your state. Add federal, Social Security and Medicare withholding percentages together -- 25 (federal), 4.2 (Social Security) and 1.45 (Medicare), as of the time of publication. Determine your state withholding tax percentage, and add this percentage to the others.

2. Figure the tax liability by dividing the total tax percentage by 100 percent. Estimating the state tax withholding at 6 percent, your equation might be 36.65 / 100 = .3665. Multiply the answer by the cash bonus amount to find the tax liability for the cash bonus. For example, if the cash bonus was $1,000, multiply .3665 * 1,000 = 366.50.

3. Add the tax liability to the cash bonus if you wish to pay the employee's tax liability. Using the same example, add 633.50 to 1,000 to equal 1,633.50. This would be the total cash bonus to pay the employee to award a net bonus of $1,000 after taxes. If you do not wish to pay the employee's tax liability, do not add this figure to the cash bonus. In this case, the tax liability will deduct from the bonus and the employee's bonus will be a smaller net figure.

4. Add the total cash bonus amount to the employee's current regular wages, identifying it as a cash bonus in your payroll system (the system should have this option). This will document the cash bonus into your payroll system, which will record the tax liability in the employee's annual earnings. The cash bonus will also appear in the employee's Form W-2 tax figures.

Tips & Warnings

• If an employee receives over $1 million in cash bonuses for a calendar year, figure federal withholding at 35 percent instead of 25 percent.

• If an employee's gross income exceeds the Social Security cap for the calendar year, omit the social security withholding percentage.

References

• Internal Revenue Service: Taxable Fringe Benefit Guide
• Internal Revenue Service: Publication 15
• Internal Revenue Service: Publication 15a

Resources

• Payroll Taxes: State Tax Research