Bonus Payments Are Subject to Income Tax

Do you shop at Home Depot? Well, the helpful people that work there are about to get bonuses! Home Depot is the latest corporation to announce it’s giving its hourly employees bonuses a one time bonus of up to $1,000 because of the recent U.S. tax reform.

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February 11th, 2018
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Do you shop at Home Depot? Well, the helpful people that work there are about to get bonuses! Home Depot is the latest corporation to announce it’s giving its hourly employees bonuses a one time bonus of up to $1,000 because of the recent U.S. tax reform. The bonuses will be based on how long an employee has been at the company, but they start at $200 and max out at $1,000 for workers who’ve been with the company at least 20 years.

Corporations like Home Depot, AT&T, Wells Fargo and Comcast are among the companies giving bonuses out this year. A bonus is a one-time or annual payment beyond their regular salary or hourly wage to reward an employee. Bonuses are a signal of our changing economic climate that business owners are giving back to all the people who are keeping their companies running. Should you give your employees a bonus? What are the tax implications if you do?

  • BUSINESS EXPENSE – If your company expects to turn a profit this year and you have extra money on your hands, you may want to consider offering your employees a one-time bonus. There are many benefits to this, including a tax deduction. You can take a deductible business expense called a payment to employees. But remember to let your employees know this is a special event, so they don’t come to expect it every year.
  • DISCRETIONARY VS. NON-DISCRETIONARY – If you plan to hand out bonuses for the first time, make sure you designate them as discretionary or non-discretionary. First time or surprise bonuses are considered discretionary bonuses because they are not expected. This includes a performance bonus that recognizes an employee, but that you don’t give out annually. Non-discretionary bonuses, including a signing bonus or one that’s part of an employment contract, need to be calculated into overtime pay. Make sure to speak to your bookkeeper or accountant about tax withholding and calculating bonuses correctly.
  • EMPLOYEE BENEFIT – Giving your employees an unexpected bonus will definitely boost morale, but remember, a bonus is taxable. If you give your employee a bonus, it will be taxed as an employee benefit. Don’t forget to withhold state and federal income taxes, including Social Security and Medicare taxes.
  • BUSINESS OWNER BONUSES – Certain business owners can also give themselves a bonus, but only if they’re an S or C Corporation. If you own an S Corporation and own your shares when a bonus is given out, then you can deduct it. If you have a C Corporation, you can only deduct a bonus if you own 50 percent or more of the company.

If you’ve ever received an expected cash bonus, then you know it is always a smile maker. A bonus can boost morale and inject money back into the economy. But before you do it, talk to your bookkeeper or accountant to make sure you can afford it and fully understand the tax implications.

I hope your company is doing well enough to offer your employees a bonus this year. It’s exciting, and a great way to recognize and thank the people who have helped you build and expand your business.

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