Hi,
If you are running a separate paycheck for this bonus, then according to the IRS, the bonus is considered 'Supplemental Wages'. As such, it should be withheld at a flat rate of 25% rather than following the same withholding rules of regular pay. If the bonus exceeds $1,000,000, a flat withholding rate of 39.7% should be used.
The FICA taxes are a fixed amount, so those would be calculated the same no matter what kind of wages you're paying.
From the IRS Publication 15:
“Supplemental wages are wage payments to an employee that aren't regular wages. They include, but aren't limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. See Regulations section 31.3402(g)-1 for additional guidance for wages paid after January 1, 2007. Also see Revenue Ruling 2008-29, 2008-24 I.R.B. 1149, available at IRS.gov/irb/2008-24_IRB/ar08.html.”
If you are running a separate check that just includes the bonus, the system is likely annualizing the bonus and calculates tax as if that were your annual pay. Quite likely no tax would be withheld on a modest bonus. Therefore, according to the IRS, you should be using the flat tax amount and not relying on the regular withholding tables.
You'll need to check your State withholding rules on supplemental wages to see how the state treats it.
If you do include the bonus with the regular pay, the withholding percentage may be much higher than 25% because of how pay is aggregated. The bonus pay plus the regular pay are added together and withholding is calculated on the annualized sum of the two.
I'm guessing you have created a separate check run including just the annual bonus.
Internal Revenue Bulletin 2008-24, mentioned above, describes nine different scenarios involving supplemental wages and how the withholding rules apply.
Kind regards,
Leslie
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