Monday, December 10, 2012

Recently the I.R.S. released a "general information" letter explaining the guidelines regarding withholding on supplemental wages. This information is very important to those companies who are paying bonuses this year and the employees who receive them.

There are three options:

1. Mandatory Flat Rate Withholding – If the aggregate total of all bonuses paid to one employee exceed 1 million dollars in a calendar year the mandatory withholding rate is 35% for 2012 for that employee. This rate is scheduled to increase to 39.6% on January 1. This flat rate is enforced regardless of the allowances claimed on the employees W-4 or requests for additional tax amounts requested to be withheld by the employee.

2. Optional Flat Rate Withholding – If aggregate total of bonuses paid to an employee are less than 1 million dollars the employer can elect to tax all supplemental payments at a flat 25%. The employer would not take into consideration any allowances claimed by the employee on their W-4 or requests for additional amounts requested withheld.

3. Aggregate Procedure – This method basically taxes bonuses at the employee's regular withholding rate. The employer would process the bonuses just like a regular payroll utilizing the employee's information on the current W-4. If an employee wants to adjust withholding prior to the payment of a bonus the employee can complete a new W-4, allow the employer to pay the bonus, then the employee must complete a new W-4 to re-establish the withholding desired for regular earnings.

As with any change in an employee's W-4 employers need to be careful not to give "tax advice" to employees.  Employers should refer employees to their personal tax advisor or I.R.S. Publication 919.