Any additional compensation to your employees over and above their standard salary or hourly rates is considered to be taxable compensation. The bonus is considered wages and must be reported as payroll on the employee’s W-2 and is subject to all applicable payroll taxes – federal and state withholding, FICA, Medicare and the related employer taxes.
On your books and records, the bonus is reported as wages on the income statement and it is fully deductible as a valid tax deduction if it is handled this way. Payments to your employees made in cash (and not reported) or recorded as other expenses are not tax deductible, and may cause unforeseen issues if the IRS or state audits your books.
Many employers like to give a flat dollar bonus amount. You can do this by choosing the amount of the bonus you want to hand to your employee and “gross-up” the amount. Most payroll services and payroll software can handle this calculation. By grossing up the flat dollar net amount, you are including the estimated taxes into the amount so that, after taxes, the amount is what you want to provide your employee.
Contact us if you need assistance with this calculation