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A tribe must report bonuses it pays an employee and include them as wages on the Form W-2. If in the form of goods or services, the tribe will add the fair market value to the employee’s income.
The IRS defines bonuses as supplemental wages paid in addition to the employee’s regular wages. How you withhold on bonuses depends on the reporting method, described below:
Bonus Combined with Regular Wages
If you pay bonuses with regular wages but do not specify the amount of each, withhold income tax as if the total were a single payment for a regular payroll period.
Bonus Identified Separately from Regular Wages
If you pay bonuses separately (or combine them in a single payment and specify the amount of each), the income tax withholding method depends partly on how you withhold income tax from your employee’s regular wages:
If you withheld income tax from an employee’s regular wages, you can use one of the following methods for the bonus:
1. Withhold a flat 25% (no other percentage allowed).
2. Add the bonus and regular wages for the most recent payroll period this year.
3. Figure the income tax withholding as if the total were a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the bonus.
If you did not withhold income tax from the employee’s regular wages, use method #2 listed above. (This would occur, for example, when the value of the employee’s withholding allowances claimed on Form W-4 is more than the wages.)
Regardless how you withhold income tax on bonuses, they are subject to social security, Medicare, and FUTA (if applicable) taxes. 3
Below are two examples:
Example 1
You pay Sharon a base salary on the first of each month. She is single and claims one allowance. Her July 1, 200X, pay is $2,000. Using the current wage bracket tables, you withhold $200. On July 15, 200X, you pay Sharon a bonus of $2,000. Electing to use supplemental payment method #2, you:
1. Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $2,000 = $4,000).
2.Determine the amount of withholding on the combined $4,000 ($613 using the wage bracket tables).
3. Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($613 - $200 = $413).
4. Withhold $413 from the bonus payment.
Example 2
The facts are the same as in the above example, except that you elect to use the flat rate method of withholding on the bonus. You withhold 25% of $2,000, or $500, from Sharon’s bonus payment.
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