Supplemental Benefits - an area that can bring a lot of confusion.
I thought this was a helpful link for bonuses. http://www.payroll-taxes.com/PayrollTaxes/supplemental_states.htm
It shows the supplemental treatment of each state. Federal is always 25% as of 2011 (unless it changes in the future).
Many companies do not necessarily pay their employees the exact ways mandated by the IRS and most states. The practice of paying employees on separate checks to make their taxes smaller, while sometimes convenient, is technically not correct and in compliance with the IRS, State, and Local agencies. The general rule of thumb is to pay all wages for a specific pay period at the normal payroll frequency, all in one check. There are a few exceptions, but not as many as most think.
Here are the two options that are allowed by the IRS for the treatment of supplemental wages:
Bonus or Supplemental wages are compensation paid to an employee in addition to regular wages and include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increases, and payments for nondeductible moving expenses.
1) Bonuses, Commissions, and any other Supplemental earnings should always be taxed at the supplemental rates. In this case we can use the Supplemental options when adding a deductions, and we should always label them as supplemental, i.e. "Bonus (Supplemental)", "Commissions (Supplemental)". These can go in one check or separate checks and it doesn't make a difference. It will always be taxed at the supplemental rate.
2) We can remove the Supplemental and treat them as regular earnings. These should always be added to the same check, and we're technically not supposed to do separate checks. This makes it the same as any other earnings code. Technically, these should always be on the same check. The most common example of supplemental wages on the same check is overtime wages.
BeyondPay recommends Option #1 and always treating Supplemental wages at the Supplemental Tax Rates
Feel free to comment below to clarify or ask questions. You may also submit a ticket, if you prefer your comments remain private.
With BeyondPay's 2.0 Platform, our system can automatically treat your bonuses, commissions, and other wages as supplemental, and automatically tax at the appropriate rates. This takes the guesswork out of the process, and allows the wages to be easily reported in one check. Or, if you decide you prefer having separate checks, they are still automatically taxed correctly keeping you automatically in compliance.