Make sure you aren't making this mistake with Employee Bonuses!

If you have employees, all labor costs should be run through your payroll system. This applies regardless of hourly or salary. I see this done incorrectly a lot with bonus checks. Bonuses need to be run through the payroll system to deduct the proper taxes and so the bonus amount is included in the annual W2. For example, if you give an employee a bonus of $1,000 in the form of cash or a non-payroll check, this amount will not be included on their W2. (The W2 is the form the employee uses to claim income on their tax return.) Whether intentional or not, failing to claim income on a tax return is referred to as tax evasion. Be sure you are following the law and process all forms of compensation through your payroll system.

GIFT CARDS:

According to IRS, gift cards given to employees are considered cash compensation and should be included in payroll. Gift cards are a cash equivalent and are treated in the same manner as cash payments. (IRS Publication 15-B (2021), page 9)

Be sure to notify your payroll company prior to giving employees gift cards. If you are not using a payroll company, be sure to add the gift card amount in your payroll system. If you are using QBO Payroll you can do this by running a bonus payroll and selecting net pay. Enter the amount of the gift card for each employee. This amount is the after tax amount. The system will calculate the amount of the bonus prior to taxes. Make sure you select PAPER CHECK and not direct deposit so you don’t accidently pay the employee twice. This entry is just to record the gift card or cash given outside of payroll not to actually sent payment to the employee.

For example, if you gave an employee a gift card with a $100 value this is the after tax amount. The pre tax amount could be $125. The system will calculate this for you.

CASH PAYMENTS:

Cash payments are treated the same as gift cards. See above for instructions.

PRO TIP:

This doesn’t mean that you can’t give your employees physical checks or even cash. You can. But you need to be sure to enter the bonus in your payroll system.

As well, you should be able to specify in your payroll system if you want the amount entered as net pay or gross pay. For example, if you want to give an employee a $1,000 bonus and you want them to actually have $1,000 you would select net pay. The system will calculate what the bonus amount is prior to taxes to get to the after-tax amount of $1,000. Adversely, if you select gross pay the actual bonus amount would be $1,000 minus taxes. So the employee would take home an amount of less than $1000.

Keep in mind; cash bonuses and gift cards cost the business more than the face value of these type of payments.

~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters.

The article is for informational purposes only and should not be construed as business, accounting, tax, or legal advice. Details are subject to change without notice.