Bonus Pay

Editor's Note: Different types of employee bonuses carry different tax consequences.

Rena PirsosOverview: Employers often provide bonuses to employees as some type of incentive. Bonuses take various forms and each type has its own particular effect on employee compensation as well as federal income and employment tax consequences.

For instance:

  • Nondiscretionary and discretionary bonuses. Under the Fair Labor Standards Act (FLSA), contractual or agreed-upon bonuses or incentives related to performance (such as for production, efficiency, attendance, or quality) must be included in an employee's regular rate of pay for the workweek in which earned. They are subject to federal income and employment taxes as supplemental wages under the Internal Revenue Code. The same rules apply to bonuses paid by an employer on the same date each year if the organization has met or exceeded certain financial goals. However, bonuses paid for work performed do not need to be included in an employee's regular rate of pay if the employer has the discretion to determine whether to pay the bonus and the amount.
  • Signing bonuses. Bonuses paid to individuals to get them to sign on as a new employee are fully taxable even if the employee has not yet begun working for the employer.
  • Contract cancellation payments. Amounts paid to employees to cancel an employee's rights under an employment contract are also generally fully taxable as wages, although some courts have held otherwise.
  • Push money exception. Manufacturers that pay salespeople working for a dealer or retailer to encourage them to "push" their products may not treat the payments as wages because the salespeople are not employed by the manufacturer.

Rena Pirsos, JD, Legal Editor

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