Expert: Shirley McAllister, CPP, PHR - 3/4/2008

Question
Our employees earn monthly incentive bonus.  They wanted to save them up to get a yearly bonus instead just before Christmas.  Is this a good idea.  Can they change their w4 at that time if they are already expecting a refund and is the a good idea for the employer to do it this way.  Could the employer owe penalties for the quarters that they earned the bonus' or would it be considered a yearly bonus.

Answer
They cannot save up a bonus, when the bonus is earned the taxes must be paid and the amount must be recorded as wages.

You can change it to an annual bonus based on the monthly incentive amounts.

A bonus check is not paid on the W-4 so it will not make any sense to change them and it is illegal to claim more exemptions on the W-4 than what they are entitled to claim.

Bonus checks are paid using the supplementary wage tables. This will mean that higher taxes are taken out. 25% for federal (whatever the supplementary state rate is ours is 8.2%), and the 7.65% for FICA and Medicare.

The only other method is the aggregate method which takes a lot of time and is not worth the effort. You have to run payroll as if the checks were included in the regular payroll, than match it against the last payroll run. Then you subtract the taxes paid on the last payroll and take the difference from the bonus check. This is not feasible for a whole company as it is very time consuming.

I think that more taxes would be taken out by paying the annual bonus than by paying the monthly bonus. The good side is if the taxes are not owed than the employee would get them refunded when they filed their income taxes.

Shirley