This time of year many companies issue employee bonuses and enter taxable fringe benefit wages. The following reminders will help you process these checks with ease.
Don’t miss the FAQ section at the end of the blog.
Deactivate Miscellaneous Deductions
The payroll software has many checks to ensure that payroll deductions are properly withheld. If the software sees that a deduction ‘should’ be withheld, but manually edited, the program may over-ride the users changes.
If you are issuing Bonus checks and do not want certain miscellaneous deductions withheld, temporarily deactivate the Deductions. Go to Payroll > Setup > Miscellaneous Deductions. Uncheck the Active settings on Deductions you want to turn off.
Note: Make sure that no other checks are entered or created that need the deductions active.
Once you have completed your Bonus checks, remember to Re-Activate the Misc. Deductions.
The calculations for Federal and State Withholding are based on the taxable wages and Employee File settings for Pay Cycle, Marital Status, and Allowances.
When issuing Bonuses you may want to use the Supplemental Federal (22%) & State Withholding Rates (varies by state).
To apply the Supplemental Withholding Rates:
After entering the Wages in Check Entry, click on the Recap tab. Then, click on the Recalc button and answer Yes to “Use supplemental federal and state withholding rates”.
If you applied Supplemental Rates and decide you want to recalculate back to the normal calculations, click the Recalc button again. Then, answer No to the use supplemental rates question.
At this time, Datatech software does not include a Net to Gross calculator. If needed, you can use an online calculator to obtain the estimated gross wage needed to result in a specific net check.
According to the IRS, a fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.
Not sure if you need to enter Fringe Benefit wages? Review the IRS Employers Tax Guide to Fringe Benefits.
The default Wage Type list should have a FR – Fringe Benefit code already set up. This wage code is Memo Wages, meaning the wages are taxable, but not included in the Gross (paid) Wages or Net Wages:
Since the fringe benefits are not paid wages, you should add Fringe Benefits to a regular or bonus check to allow for the tax deductions to be offset with wages.
For example, using the above example of a $2,000 bonus check, we’ll add $1,500 fringe benefit wages. When you put your cursor over the tax withholdings, you’ll see that the taxable wages include the fringe wages, but the Gross & Net only includes the bonus wages:
You can also use the Tooltip (F12) to see the Explanation of Withholding Calculations:
Here are some of our most frequently asked questions on bonuses.
If a gift to an employee is not specifically excluded in the IRS Fringe Benefit Guide, the value of the gift should be entered as a fringe benefit.
If you have any questions on how to calculate that value, please refer to your accountant for advice.
Bonuses to employees are taxable wages. There are provisions, however, in the IRS’s Agricultural Employer’s Tax Guide for the employer to cover the employee’s share of Social Security and Medicare taxes. The amount of taxes covered would need to be added to the employee’s Personal Income Tax Wages (but not additional to Social Security, Medicare, or FUTA).
Follow these steps to prepare a bonus payment with the employer covering the Social Security & Medicare:
1) Set up a new Memo wage type for the taxable income that will be added. This should have the Federal Withholding tax calculation checked, but no Social Security, Medicare, or FUTA. We recommend leaving the State Withholding/SDI/SUI checked. If your state has specific provisions for taxability of other income, you may adjust as necessary.
2) Set up a Miscellaneous Deduction to offset the calculated Social Security & Medicare Withholdings.
3) After entering the bonus wages, enter a second line with the memo wage code for the amount of Social Security & Medicare Taxes the employer is paying on behalf of the employee.
4) Enter a negative deduction to offset the calculated Social Security & Medicare withholdings.
Note: The employee will still have Federal Withholding, State Withholding, and SDI taxes withheld (and other taxes depending on your state). Social Security and Medicare are the only taxes that have specific documentation that the employee portion may be paid by the employer.
If you need the check date to be in 2020, you will need to re-open the year.
Before you start, make sure there are no other users creating, voiding, or printing checks for the current year.
Go to Payroll > Utilities > Fix Employee Totals > Change Qtr/Year.
After completing the 2020 checks, re-close the quarter & year.
Then, go back to the Fix Employee Totals and use the Change Qtr/Year to update the Q1/Year 2021 totals in the Employee file.
First, it is recommended that you have a Workers Comp Class/L&I code set up for an Exempt category. You can check for this by going to Payroll > Setup > Workers Comp Table. Click on the W/C Codes tab. If you don’t have an entry already, add a code like 0000 or 9999 with the description Exempt and 0 rate.
Second, if you have your Workers Comp itemized by Cost Center and/or Job, you can set up a new Job for Exempt Bonuses. Then, on the Workers Comp/L&I table, enter the combination of G/L, Cost Center, and Job that will be used for the exempt bonuses and select the Exempt WC/L&I Class code.
If your bonus amount is too large for the check to accept on one line item, split the amount on multiple line items.
For example, if your bonus is $100,000, split the line items as $50,000 per line. The gross will equal $100,000.