How Annual Bonuses Are Taxed — 7 Common Questions Answered

Everybody loves an annual bonus. Not everyone understands how bonuses affect their tax returns, however, or even what is considered to be a bonus by the Internal Revenue Service (IRS).

Sometimes, when people receives an annual bonus from their employer, they are surprised at how small it is after tax. They may even wonder if their employer correctly calculated the withholding tax.

Following are some common questions about bonuses and the IRS, along with the answers you need to know.

Why does my employer withhold more from my bonus than from regular pay?

If you receive a bonus or other supplemental income separate from your regular pay, your employer must use an IRS-approved method to determine how much tax should be withheld.

Your employer calculates the withholding amount based on your pay, the time period, and the information on the IRS Form W-4 you filled out.

Alternatively, your employer has the option of withholding a flat 25 percent income tax from your bonus amount.

Are bonuses subject to payroll taxes?

Yes, you and your employer must pay payroll taxes on bonuses, just as you do with your regular pay.

Could my employer have made a mistake?

It happens. If your payroll department calculates withholding tax by hand, they could inadvertently read the wrong column or look at an incorrect form.

Even companies that use payroll software or services can accidentally enter the wrong information.

Most of the time, however, the withholding tax on bonuses is calculated according to IRS rules. If you have questions about the amount withheld from your bonus, the best first step is to talk to your payroll department.

I’m sure they withheld more tax than necessary. What can I do?

Assuming your employer calculated the bonus withholding correctly, you cannot get the withheld tax back from the IRS until you file next year’s tax return.

An easy way to even out the amount you have withheld is to file a new Form W-4. Adjusting your withholdings can reduce the amount of tax withheld from your pay for the rest of the year. Be sure to file another Form W-4 next year or whenever you need to adjust it again.

How can I prevent overwithholding from my bonus next year?

The easiest way to have less tax withheld from your bonus and your regular pay is to claim additional withholding allowances on Form W-4. Ask for a new form from your payroll department or get one from the IRS website.

Keep in mind that you can claim as many allowances as you need to in order to have the correct amount withheld from your pay.

You are not limited to the number of dependents you have or to the amount you calculate on the IRS worksheet.

Ask your payroll department how long it takes for a new Form W-4 to take effect, and submit the new form before you expect a bonus check. Do not send the form to the IRS.

You can file another Form W-4 after you receive your bonus, or at any time during the year when you need to change your withholding amount.

What counts as a bonus for tax purposes?

A bonus, according to the IRS, is any payment made from an employer to an employee that is in addition to regular compensation.

It can be cash or non-cash. A holiday bonus is taxable, even if it is presented as a gift. If you receive a small non-cash holiday gift from your employer, such as a ham or popcorn tin, you don’t have to claim it as a bonus, however.

The IRS specifically excludes such “de minimus fringe benefits” from taxation.

Can getting a bonus bump me into a higher tax bracket?

It’s possible that a bonus, or an increase in pay, can put you in a higher tax bracket. That means you will pay a higher tax rate on each additional dollar you earn.

Some people think they may actually have less after-tax income because of a bonus, but this is not true.

Being in a higher tax bracket does not change the rate you pay on everything you earn – only the rate you pay on taxable income that exceeds a certain amount.

So, relax and enjoy your bonus!

6 Business Policies You Should Put in Writing (and Why)

One way to keep your business financially sound is to do all you can to mitigate risks. You can protect your business by putting certain policies in writing. Here are six policies that every small-business owner should have in written form.

1. Returns Policy

If you run a retail business or online store, it’s important that you clearly post your returns policy so customers will know what to expect if they want to return an item or ask for a refund. In the policy, you should outline how long after the purchase you will accept an item, what condition the item should be in, if customers need a receipt, if you charge restocking fees, and how you will refund customers’ money. Be sure that your policy conforms to your state’s laws. For example, retailers in California must post their policy where customers can clearly see it before making a purchase.

2. Business Hours and Turnaround Time

Customers need to know when they can reach you, whether you own a retail store, service business, or online shop. You should state your business hours in writing, so customers won’t feel neglected should an emergency or question arise outside business hours. For example, if you run a website, but only respond to customer email from 9 to 5 Pacific Time, make sure your visitors understand that. Likewise, if you run a service business and are available after hours for some things, be sure to let customers know how to reach you then.

You will also need to include your turnaround times for ongoing projects. For instance, if you build custom furniture, include the average wait time for each piece in your policy so customers will know what to expect.

3. Workplace Safety Rules

In addition to adhering to your state and Occupational Safety and Health Administration safety standards, you should create a workplace safety policy for your business in to inform your employees what is expected of them. Once they acknowledge they’ve read it, it can help mitigate any damages that might be caused by employee negligence. You can download a free workplace safety sample, then schedule a free OSHA onsite consultation to determine the specific work hazards you should address in your policy.

4. Device Use Rules

If your employees use your computers, tablets, or phones to conduct illicit or illegal activities, or if they get into an auto accident while using them, your business can be held responsible. That’s why it’s important to create a written device use policy that outlines exactly what employees can and cannot use the devices for. Once your employees read the policy and sign it, if they commit an act that results in legal or financial consequences, you will be less likely to be held accountable. In addition, your policy should address the specific risks associated with bring your own device (BYOD), even if you don’t have a BYOD policy in place. Keep in mind that in addition to creating the policy in written form, you will also need to prove that you enforce it on a consistent basis.

5. Disciplinary Policy

Your employees should have a thorough understanding of what behavior is acceptable in the workplace. A disciplinary policy informs them what will happen if they break the rules. Your disciplinary policy should include a list of actions that require discipline, the consequences of those actions, the steps and procedures for enforcement, and what rights they have if they want to appeal. If you have to terminate an employee, this record of disciplinary actions will be helpful. The ultimate goal of your policy should be to provide your employees a chance to change their behavior.

6. Late Payment Fees

Before you extend credit to customers, it’s important to have a late payment fee policy in place. For instance, you may require that customers pay your bank fees in the event of a bounced check, interest on past due invoices, or collection of legal fees if you have to hire an agency or attorney to recoup your money. Your state laws may limit the amount of interest you can charge, so be sure to check yours.

By putting all of these policies in writing, you will go a long way toward protecting your business. If you don’t have all of these policies in place in your business, why not start now?

If you have any questions about setting up your companies workplace policies, please feel free to contact our office.

Affordable Care Act and Employers: Understanding Affordable and Minimum Value Coverage

In general, under the employer shared responsibility provisions of the Affordable Care Act, an applicable large employer

may either offer affordable minimum essential coverage that provides minimum value to its full-time employees and their dependents or potentially owe an employer shared responsibility payment to the IRS.

Here are definitions to help you understand affordable coverage and minimum value coverage.

Affordable coverage: If the lowest cost self-only only health plan is 9.5 percent or less of your full-time employee’s household income then the coverage is considered affordable. Because you likely will not know your employee’s household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to the employer.

Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

Under existing guidance, employers generally must use a minimum value calculator developed by HHS to determine if a plan with standard features provides minimum value. Plans with nonstandard features are required to obtain an actuarial certification for the nonstandard features. The guidance also describes certain safe harbor plan designs that will satisfy minimum value.

If you have any questions, please feel free to contact our office.

Source: IRS

MyRA Program Now Available.

A new simplified Roth IRA is the latest retirement plan. The account is called a myRA (short for “my retirement account”). It’s funded by having your employer make direct paycheck deposits to your retirement account. The contributions to your myRA are invested in government-guaranteed Treasury securities. A myRA isn’t connected to your employer; it belongs entirely to you and can be moved to any new employer that offers direct deposit capability. The annual contribution limits that apply to regular Roth IRAs apply to myRAs.

To find out more about myRAs, contact our office.