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Tax Considerations for Christmas Bonuses

By December 12, 2023Payroll, Tips

This time of year, many employers like to reward their employees with Christmas bonuses.

While this gesture is usually enthusiastically received by employees, they’re often surprised at the amount of taxes that are withheld.

The IRS includes bonuses on its list of wage payments that are treated as supplemental wages instead of regular wages. Assuming that you’re not paying your employees more than $1 million each in bonuses, the withholding rate is 22%. Bonuses are also subject to Social Security, Medicare and state supplemental taxes.

Consider Grossing Up Bonuses

Employers often decide to “gross up” the amount of their bonuses to cover taxes for the employee. If you have an intended amount that you want an employee to receive, you would scale up the gross payment to include the bonus amount and the amount of estimated taxes on the bonus.

This formula demonstrates how to calculate a gross up:

Gross pay = net pay / (1 – tax rate)

For example, if you intend for a Georgia-based employee to have a net bonus of $500 to take home:

  • Add up the taxes owed for federal supplemental wages, Social Security, Medicare and state supplemental wages:
    • Federal supplemental wages: 22%
    • Social Security tax: 6.2%
    • Medicare tax: 1.45%
    • Georgia supplemental tax rate (for annual salaries over $15,000): 5.75%.
  • Total taxes owed: 35.4% (0.354)
  • 1 – tax rate = 0.646

Divide the net pay ($500) by the rate (0.646), which equals $773.99.

Therefore, the total grossed-up bonus pay for a $500 net bonus should equal $773.99 if it’s going to cover taxes.

Calculating the taxes on bonuses can be tricky. Please call MarathonHR for help and guidance if you have questions about issuing your company Christmas bonuses this year.

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