"Master Payroll Taxes for Bonuses & Commissions"

This article provides a step-by-step guide to calculating payroll taxes on bonuses and commissions, which are categorized as supplemental wages, covering federal, state, and local tax considerations alongside compliance with reporting and payroll software settings. It emphasizes key distinctions in handling these payments to ensure accurate tax withholding and adherence to regulations.

Payroll tax calculations for bonuses and commissions can be complex because these payments are considered supplemental wages. Below is a detailed guide on how to handle bonuses and commissions in payroll tax calculations, formatted as a table for easy reference.
Step Description
1 Identify whether the payment is a bonus or commission. Both are considered supplemental wages but may be treated differently depending on company policies or state regulations.
2 Determine the employee's regular wages. The calculation method depends on whether the bonus or commission is paid separately or combined with regular wages.
3 Apply federal income tax withholding. For bonuses and commissions paid separately, you can use the IRS flat supplemental rate (currently 22%). For payments combined with regular wages, use the aggregate method to calculate withholding.
4 Calculate Social Security and Medicare taxes. Bonuses and commissions are subject to Social Security (6.2%) and Medicare (1.45%) taxes unless the employee has exceeded the annual wage base limit.
5 Consider state and local taxes. Different states may have varying tax rates for supplemental wages, so ensure compliance with local tax laws.
6 Include the bonus or commission in the employee’s gross income for reporting purposes. These payments must be reported on Form W-2 at the end of the year.
7 Verify deductions for retirement plans or benefits. Bonuses and commissions may be subject to deductions for 401(k) plans, health insurance, or other benefits.
8 Ensure compliance with payroll software settings. Update your payroll system to correctly calculate taxes on supplemental wages according to current tax laws.


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