13 Jul Talent Attraction and Retention Using Bonuses
I know my fellow small business owners feel the pain of wanting to attract high-value talent – and retain that talent – in this difficult hiring market. One way to do so is to offer bonuses and incentives, but the issue is that bonus pay is taxed at a higher rate. We want to make sure our employees are well-taken care of, and that their bonus pay doesn’t all go to taxes.
For example, we have a client for whom we run payroll. This client often gives small bonuses, such as $100, for various reasons. The problem is that some payroll processors are not bonus-friendly, especially when employees have extra withholdings set up on their federal or state taxes, depending on their family situation. Sometimes, this results in the “bonus” being a NEGATIVE number! Not much of a bonus! We then have to go in and over-ride the payroll numbers, which takes many steps and is time consuming. As we all know, time is money! In the end, the employee might get a $12 net bonus from the original $100 bonus.
Thankfully, we can help you avoid this! If you want to pay a bonus outside of your regular payroll, you should run a BONUS PAYROLL. There’s no extra fee to run the bonus payroll. Bonus payrolls default to the supplemental 22% withholding rate per the IRS; but if the bonus is run with the regular payroll, it will be taxed as regular wages. This applies not only to bonuses but for all supplemental wages.
Supplemental wages
Supplemental wages refers to various types of additional compensation that an employee may receive alongside their regular wages, such as:
- Commissions
- Overtime pay (if paid separately from regular wages)
- Payments for accumulated sick leave
- Severance pay
- Reported tips (if paid separately from regular wages)
- Awards, prizes, and bonuses
- Back-pay
- Retroactive pay increases
- Payments for nondeductible moving expenses
- Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a non-accountable plan
Tips for running a bonus payroll in Gusto
Below are some handy instructions from the folks at Gusto to help you run a bonus payroll in Gusto and handle supplemental wages separately from regular wages – with a flat 22% withholding rate:
- Access the Gusto Help Center or Payroll Dashboard.
- Select the option for “Bonus Payroll.” (under the “other payroll options” section)
- Choose the employees who should be included in the bonus payroll.
- Specify the applicable period for the bonus payroll.
- Ensure that all deductions and contributions, except for the 401(K), are blocked.
- Add the bonus amount to the Gross Earnings section.
- If the client has issued a check to the employee for the bonus, enter the bonus amount in the Net Earnings section and select the “Check” option instead of “Direct Deposit.”
For further instructions from Gusto, go to Gusto Help Center – Bonus payrolls.
For more information from the IRS, go to:
Publication 15 (2023), (Circular E), Employer’s Tax Guide | Internal Revenue Service (irs.gov)
By following these steps, you can successfully run a bonus payroll in Gusto while correctly handling supplemental wages and applying the designated 22% withholding rate.
