Bonus Checks

If your business will be issuing bonus checks to employees for the first time, you may be wondering the best way to go about it. Should you include the bonus as part of a regular paycheck, or issue a completely separate bonus check? In the end, issuing a separate bonus check is the preferable method for the reasons detailed below.

• By not including bonus money in with a regular paycheck, you are simplifying the recordkeeping for both your company and your employees. If you blend the two together, your employees may have to manually separate the numbers to determine any impact on their tax liabilities. Separating the two checks is also helpful to your Human Resources Department when they are reconciling the bonuses and verifying them for accuracy.
• Similarly, your accountants will thank you for keeping to the two checks separate, particularly if the financial account you are using to issue the bonuses is different from the account you use for your payroll expenditures.
• The most important reason to issue your employees separate bonus checks is that it prevents them from being inadvertently bumped into a higher tax bracket. A bonus lumped into a regular paycheck would increase an employee’s overall salary for the year, which could result in them paying a higher tax rate on all wages earned. However, bonus payments not added to a regular paycheck are considered by the IRS to be supplemental wages, which will be taxed at a flat rate of 25 percent.

Should you decide to issue a separate bonus check, it is wise to include it in the same envelope as the regular paycheck, especially if you are not issuing bonus checks to all employees. This will help to avoid any possible dissention among employees, and hopefully prevent you having to answer uncomfortable questions regarding who was rewarded and why.