Are federal taxes on Company paid Annual bonuses calculated @ 25%? My Payroll department says that federal law requires the 25% tax.

Internal Revenue Bulletin - September 11, 2006 - T.D. 9276

I have never even heard of this. It's been about 4 years since I've done payroll but I've done many years of it and don't recall anything about a flat rate for supplemental income. I don't even remember seeing any such thing in a Circular E before.

According to what I'm reading here, law is not requiring an employer to withhold any particular amount. It's more like allowing them to. (Assuming it's under 1 million.) And there's stipulations about when it can even be done.

I'm glad I've never worked for a bigger company, because small companies usually ignore this type of thing anyway. The problem comes in the fact that if you treat a bonus (or vacation check, etc.) as a regular payroll check, the taxes can get all mucked up. When I did payroll at small companies, I had my own way to deal with that issue because I had control over what I did and could adjust anything I wanted in the software to account for it. But places with payroll departments and set regulations can't do that kind of thing.

It all sounds a little weird to me, because ultimately, the individual employee is actually responsible for their own taxes, not the company. The company has never been responsible for how someone's taxes are done. i.e. I can walk in and claim 5 exemptions and that's what they follow; they don't make a decision for me how many exemptions to take. I'd be a little miffed if a company took out 25% of any supplemental wages for me. It would result in a refund, which it sounds like is what they're trying to avoid. (They mentioned the problem of "overwithholding.")

Well, you were looking for answer, not a commentary. :-) As long as it's under 1 million, looks like it's not required, but optional. i.e. there are two methods to do it.

Usually firms take the easy way out and do a separate check for bonus payments. According to IRS regs, compensation paid in addition to your regular wages (via a separate check) are taxed at the supplemental tax rate of 25% for payments under 1 million. See ruling Internal Revenue Service, publication 15, page 13-14

The other way to tax a bonus is to add the bonus to your regular wages and tax according to your W4. This is also addressed in pub 15.

I read that section and as long as it's under 1 million, the 25% still does not sound like a requirement. It's one optional method.

I never considered doing a separate check as the "easy way out." It was the logical way to do it so that it didn't totally muck up the taxes from having a paycheck be way too big.

Given the number of people who are in a lower bracket, it seems like a silly amount to withhold. Or the number of people who are in a higher bracket. Especially since that listed overtime as supplemental pay. Overtime is supplemental?

I think it has a bit more to do with the fact that I've always worked at small companies and no one is getting huge bonuses or anything. Small ones, vacation pay, etc. That's been it. And I've never done it this way for 20 years of doing payroll and the IRS hasn't complained about it yet. :-) Small companies ignore stuff like that and big companies have payroll departments with people who have no clue about this - they just stick it into the computer. And smaller accounting programs aren't really set up to handle this, other than being able to manually change the tax amount.

It's bad enough that they make employers responsible for deducting and paying people's taxes for them, let alone dictating stuff like this.

Well... I'm more just off complaining about the IRS now. :-)

Your correct that is one option to tax the bonus. The firm I work for when we tax bonus payments for staff, we add it to the regular check and tax according to the W4. It will put you in a higher tax bracket, but no where near the 25%.

I know where you are coming from... we're the W4 police.

Morgaine300? You scare me! Even though you have done payroll for small companies for many years, it's very apparent you have had no formal training in payroll tax law.
I am a CPP (Certified Payroll Professional) sanctioned by the APA (American Payroll Association) and work for a payroll software firm as a Tax Expert. I would highly recommend you visit the APA website... www.apa.com... and find out how to take a class or two in payroll.
VGause - Federal law, per the Circular E (which, if you wish to look it up on the IRS website, is Publication 15, states there are two different methods of taxation for any type of taxable payment that is NOT tied specifically to hours worked: 1) Flat Rate or 2) Aggregate. fhoss3634 says the Aggregate method usually will not put you in as high of a tax bracket as the supplemental rate. Well, that all depends... on the way you completed your W-4 form, the amount of the bonus, etc. etc.
I have MANUALLY calculated many bonuses both ways - both with the aggregate method as well as the supplemental tax rate. When doing these manual calculations, when comparing the aggregate method (adding the employees' regular pay for that pay period with the bonus) vs the flat rate method, you must remember to add the taxes taken on the regular paycheck for that same pay period. THEN you are truly comparing "apples to apples".
The problem with the bonus Vgause is referring to is that it's an ANNUAL bonus. As such, in order to do the aggregate method, you would need to take the annual taxable wages PLUS the amount of the bonus, deduct the non-taxable deductions anduse the percentage method for annual in the Circular E for the correct W4 marital status and number of allowances. Yes, it can be done as long as all the pertinent data is available. However, I don't know of a software that will allow you to choose which taxation method to use for each individual bonus being paid out - aggregate or fixed rate. The actual type of payment is usually set up to all be taxed the same way, so no "favoritism" can be claimed.
Chances are, that is what is occurring with your annual bonus... the software has been set up to tax all annual bonuses at the fixed rate. WHICH IS QUITE LEGAL!
The only "blue sky" I can give you is that, at the end of the year when you file your 1040 tax return, any and all overwithheld taxes WILL be refunded to you.

nepcpp, the original question was whether the 25% was REQUIRED. I read two different things, both of which said if under 1 million that a company doing the flat 25% was a way it could be done, under certain circumstances. (i.e. under other certain circumstances could not be done that way.) I also included the link to the thing at the IRS site discussing this. And I went back and read the current Circular E when fhoss brought it up. Says the same thing. If the flat rate is required under all circumstances, please feel free to show me where it says that, and therefore where I was wrong in that statement.

If someone is just using your basic payroll program, adding supplemental pay to a check does tend to mess up the taxes. And yes, of course it will depend upon other factors, but it can very easily mess up the taxes. I actually do understand the math behind it very well, and I can see with my own eyes what problems it causes. (In fact, the link I gave in the first post even mentioned the issue with aggregate causing a problem with the taxes. Is the IRS wrong too?) This can cause a big problem for, say, a week's vacation added to a check which doubles the pay and the taxes will be figured accordingly. Same with anything that will shoot someone into a higher bracket. An especially big bonus could really mess it up.

You said yourself that you didn't know of any payroll program that would allow you to make the choice of doing the flat rate. Didn't I just say the same thing? And given that, the software is going to mess up the taxes under a lot of circumstances, yes.

I also stated that when I was doing payroll, I had "my own way" of taking care of this issue. I never mentioned what those ways were, did I? If the software can't do it right, you have to have a way to take care of it, don't you? If it's rigid software that really won't allow this, then it's going to be darn difficult to even follow this law.

I admit that I was not aware of this law, so I did different things to make the taxes work out, which in my personal opinion, worked out better than using some flat rate that may or may not work out. Especially since at small companies, there are many people not getting paid a lot and 25% would just really mess things up, as much as trying to do it aggregate. (I stress the "in my personal opinion" so you don't confuse that as a statement about tax law.)

I'd also stated that I'd done this for years and the IRS hadn't complained yet. That was not a quote of tax law. (I even put a smiley after it, but somehow I'm not sure you have a concept of a smiley.) Small companies especially do all kinds of stuff like that. Quite frankly, if the IRS ever came in and audited our payroll, I have to seriously doubt they'd have a cow over it. (Believe it or not, I have dealt with the IRS.) Correct or not, it's quite common for even accountants to do things incorrectly at small companies, because in the long run it doesn't really end up mattering. That's not a reflection of whether they know what they're doing. It's just the way things are out in the real world.

The only comment relating to the tax law, which is what you are complaining about, is that it did not look like a requirement, but rather two options. You said that yourself. I didn't see you tell me that I was wrong in that statement. I admitted from the start I'd never heard of it. I looked it up, gave a link to what I read, and reported what I read. And I have not seen you contradict that part. And that was the original question of the poster -- was it required to use that flat rate method?

Yes, I made a lot of comments that were opinion. Just that: opinion. I believe everything I said, which is why I said it. I said it all sounded "a little weird" to me. Well, it does. I referred to it as "silly." I don't believe "silly" is a tax law. I seriously do believe the IRS is nuts on this one, and yes I do get tired of companies having to be responsible for all this type of thing, being responsible for their employee's taxes when employees are responsible for their own taxes. And the IRS doesn't even pay them to do all that work. And then making it worse is the employees trying to make the company responsible, when the company doesn't even know their personal situation.

I even ended my first post with "Well, you were looking for answer, not a commentary. :-) As long as it's under 1 million, looks like it's not required, but optional. i.e. there are two methods to do it." I admitted it was commentary, and then reiterated the answer to the actual question. Again, show me where that answer is incorrect.

It appears that you are so caught up in your laws that you've forgotten the concept of having an opinion or judging anything. That's when the IRS comes in and walks all over you. Which means you scare me.

If you want to complain about something, at least make it about the fact that I got off on too much opinion or something like that, instead of complaining about my lack of knowledge about payroll. In terms of the actual tax law itself, you have yet to show me where what I said was incorrect.

I recently wrote a nice article on this very topic. It is updated with 2009 percentages and goes through the specific lanuage of section 7 of publication 15. I think you will like it:

One Million Bucks!: My Personal Finance Journey: Why Is My Bonus Taxed So Much?

Here is a snippet:
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Don't forget the following additional bonus withholdings as well:

1. Social Security Taxes = 6.2% up to $106,800 of income (2009)
2. Medicare Taxes = 1.45% on all wages
3. FUTA (Federal Unemployment TAxes) = 6.2% up to $7,000 of income
4. State Taxes (lest we forget) = See your local state government website

I agree with NEPCPP.

By the payroll department saying it is required than perhaps it is required of the payroll department by the company.

If the company writes up a policy that says all bonus checks will be handled in this manner the IRS likes consistency. If this is true than yes the payroll department is required to do it in the way the company tells them to do it.

It is the choice of the company whether they wish to use the aggregate method or the supplemental method. Most companies use the supplemental method because not only is it easier and less time consuming, but it is the method that is used by all the outsourcing companies such as ADP and Ceridian.

Also if no tax was withheld on the last payroll for any employee than the aggregate method cannot be used.

Remember it is an option, but it is the company that choses the option the employee does not get to choose.

Payroll is a department of the company and those employees get paid to do the payroll. If the company says to use the supplement method they are required to do so.

Shirley

I just received my first ever 'extra pay' as a summer school teacher... They hit me for the 25% as well... It is state law in Indiana.

My power plant is being shut down and we are being given the option to take a job where we live or go to another power plant 100 miles away and fill a position there. If we go to the other power plant the company will give us 70,000 dollars. Its being termed as a "relocation bonus". Whether you take it and go to the other plant or stay at a job close to home( in which case you get nothing) will be determined in late April . If you go to the other power plant you will get your money a week later. We are being told that at least 40% will go to the IRS. Is this correct and if not how should it be taxed. Currently most us are on schedule to earn at least 100,000 dollars of income for the year. Thanks

It is a bonus check. It is taxed the following.

25% federal tax
7.65 fica/medicare tax
?? State tax (whatever your states rate is for bonus checks ours is 7.25.
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If you use ours the rate is 39.9% so your state tax must be a little higher. That is pretty close.

You can read this in publication 15 on page 14 I believe I don't have 2013 in front of me but it hasn't changed from 2012 for the federal withholding. The fica was changed from when the payday holiday went away.

Shirley