Employee Bonuses Are Taxable Income

As a business owner, you may consider distributing bonuses to employees as a show of appreciation for their passion and dedication to the business and/or to reward employees for exceptional performance and/or achievements. It’s important to remember that bonuses should be treated as taxable income and reported accordingly.

You should process bonuses through payroll and follow standard payroll practices to ensure the proper tax withholding for federal, state and local income tax and FICA (Medicare & Social Security Tax). Generally, bonuses can either be run as an additional payroll outside of your normal payroll cycle or added to one of your normal payroll cycles.

If you plan on running an additional payroll, check with your payroll representative (if you use a payroll company) on how to submit the additional bonus payroll especially if this is your first time submitting an additional payroll. Your payroll company may have specific procedures for processing bonus payrolls (or additional payrolls outside of your normal payroll cycle). Pay close attention to the payroll submission due dates to ensure your bonus and regularly scheduled payrolls are submitted on a timely basis and the payrolls are properly funded. Also, make sure your business bank account is adequately funded to cover your additional payroll expenses.

If you have questions or concerns regarding the proper handling of bonus income, check with your payroll representative and/or your tax professional.