Open Forum

Good day! Wondering how everyone pays their bonuses and commissions. Are you adding to regular check or a 2nd check. I have always done a 2nd check with bonus taxation, but am now being questioned on why we don't add to the regular check. Being sited is the employee experience, they should not have to go to two pay stubs in a payroll period. My issue is if we add to the regular paycheck, then taxes will be even higher for the employee! Thank you!!!

Hi Ginger,

We've processed both ways. Majority of the time, we'll issue any type of bonus on a separate check and use the flat supplemental rate of 22%. This makes it easier for our employee's to see the taxation separately even though if we were to include the bonus on their regular paycheck, the bonus would tax separately at the supplemental rate and the FICA would be flat percentages anyway (granted that they haven't met any of the wage caps). Depending on the amount of wages that the employee has, it also may benefit them for less state income tax as well.

The IRS allows for either method; aggregate by combining both regular and supplemental wages (granted that certain requirements are met) or at the flat supplemental rate on their website. Search for "supplemental" and it will be a little more than 1/3 of the way down. 

I guess it comes down to your company's preference and how your employee's view the experience. Having the bonus separate from the regular pay we feel is a better experience for our employees as we have received inquiries in the past about the increased taxes due to higher taxable wages. Of course we in payroll know this to possibly not be true (at least on the federal side and possibly on the state; depending) but it's sure easier to explain when the bonus is broken out rather than included on the same pay.

Hope this helps!

Aloha,

Destin Cadelinia, CPP

Senior Analyst, Payroll Compliance

Hi Ginger,

We also process about 99% of our bonuses and all commissions on a 2nd check with bonus taxation.  Just cleaner to do it this way.  Rarely we will add very small bonuses to the normal check.

Stacey

I would counter the 'employee experience' point that 2 pay statements/direct deposits are clearer to the employee, because when they get 2 deposits, they know that one of them is the bonus/commission.

If the amounts are small, and your population is not highly paid, adding to the paycheck can result in more favorable tax withholding for the employee. When the bonus amounts are larger, adding it to the check could result in the whole paycheck being taxed at higher than a 22% rate, which affects the employee greatly. 

My response is  ... (as with many things) it depends. 

I have done both ways. If it is a companywide bonus we will do a separate check and tax at the supplemental rate. If it isn't a companywide bonus and just one offs here and there then we add to the regular check and follow the aggregate method. If it is a large bonus/commission payment I like to put it on it's own payroll and separate check. It makes it easier to confirm totals. We've had complaints both ways due to taxes as some benefit from the separate check and other benefit from the aggregate method. Whatever you do just make sure you are consistent and doing the same process for everyone. 

I did it both ways at my previous employer, depending on the nature of the bonus and its timing.  Store manager bonuses paid every four weeks were paid separately and I used the flat-rate withholding.  Distribution truck driver period bonuses paid every four weeks were included with their regular pay and I used the aggregate method of withholding.  The timing with how the store manager bonuses were processed meant those employees would have to wait almost an additional two weeks to receive them with regular pay, and the Powers That Be didn't want that.  Annual one-time merit bonuses (in lieu of a salary increase) were included with regular pay and withholding based on aggregate, the justification being that's how a salary increase was handled.  Other one-time bonuses were usually paid on their own because of timing; TPTB didn't want them to wait until the next regular payday.

I generally don't worry about withholding amounts with flat-rate vs. aggregate.  My take is that the best thing for employees is to be as consistent as possible with each bonus type so each employee knows what to expect, and he/she can adjust withholding from future regular wages by submitting a new Form W-4.  "The employee is taxed higher/lower" really isn't an accurate statement.  Withholding may be different with one method vs. the other, but that has no effect on actual tax liability when the employee completes his/her income tax returns.  (Getting a bit off-topic, it's for that reason it's best that we not say to an employee "your bonus/commission/whatever is taxed at..." but instead say "we withhold tax from your bonus/commission/whatever based on...")

We do bonuses as a 2nd check. It's easier to show employees and easier for me to see when there was a bonus amount paid out when looking at gross amounts in a list of checks if I have to look for one to answer a question on it. Also the tax liability when they file their taxes all works out so in the while it may make a short term difference, in the end there is none. 

Like many here, we process bonuses and commissions as a second/separate paycheck. We used to include it all in one check, and we got complaints from employees who didn't like the tax breakdown, or didn't want to defer retirement funds from those payments, or just thought it was unclear.

Someone will always find something to complain about :)

Ginger,  You can have them on the check with the regular wages and it will likely tax them higher.  But whatever you decide to do as a company, you want to be consistent where every employee is treated the same.  We do our regular paycheck as their first check.  Our commissions and bonuses are considered supplemental wages so we make it as a separate check and tax at the supplemental tax rate.  We explain to employees that we choose to tax at the supplemental rate for two reasons - all employees are treated the same and their regular pay is consistent despite when a quarterly commission or bonus are paid.  We haven't had any complaints.  I hope this helps. Some people may be surprised to learn their regular wages will be impacted with higher withholding if they are combines.  So education always helps.

We pay on a 2nd check.  We've been asked why several times and our answer is that it is cleaner for the employee and us.  Also, some employees want their commissions or bonuses to go to a separate bank account.  Single checks won't allow that option.

We do commissions and bonuses as a second check.  When asked, we let the employee know that we treat all supplemental payments as a separate check so they can see how it is taxed and because they are not 401k eligible.  We find it is more clean cut and easy for the employee to see.

We add them to the regular checks. I'm not sure why you say the taxes would be higher if it was on the regular check.  Are you using the supplemental rate or the aggregate method?  Either way I would think it would work out the same whether it is on a separate check vs the regular one.  Actually, I would argue that paying the bonus on the regular check would result in less tax withheld because the pretax benefit deductions would be used to reduce the taxable income.  If it is on its own you wouldn't have those benefit pretax deductions.   For us the bonus is set up as supplemental income and withholds at the supplemental rate and the regular wages calculate at the W4 rate.  Hope this helps!

My company makes bonus payments as a second pay and we automatically add the bonus taxation to it as well. 

We use ADP WFN. I upload our bonus payments as and EPI batch and use pay 1 with the tax frequency being Bonus. The regular pay (on the same check) goes by the W-2 elections and the Bonus uses the supplemental rate. Though it's fun trying to explain this to the employees when I first did it but they eventually got it. :)