Everything You Need to Know (Taxwise) About Year-End Bonuses

If your business can afford it and you want to reward employees, year-end cash bonuses may be the way to go. In providing this additional compensation, understand what it means from a tax perspective.

Bonuses are treated like other pay

They are subject to income tax withholding, FICA, and FUTA taxes in the same manner as regular pay. In figuring the cost of a bonus to you, factor in employment taxes. For example, if an employee earning $65,000 is given a $5,000 year-end bonus, the cost of that bonus to you is $5,382.50 ($5,000 + $382.50 employer share of FICA tax).

When withholding income taxes on the bonus (called “supplemental pay” by the IRS), there are several options.

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