When it comes to receiving bonus compensation from your employer, a number of factors come into consideration as far as taxes go. Tax laws are complex and depend a great deal on the nature and the value of the gift. In some cases, the tax withholding on your bonus can be even more significant than the usual tax deductions from your regular paychecks.
If your boss gives you a bonus separate and apart from your regular paycheck, this makes it "supplemental income," so she can't tax it according to the dependency exemptions you claim for your regular salary or wages. If it's more than $1,000, the supplemental wages tax is 35 percent as of 2011, plus the usual Social Security and Medicare deductions. If it's less than $1,000, it's subject to withholding of 25 percent, plus the other deductions.
A gift certificate for a particular item at a particular store usually isn't taxable, provided that you can't convert it to cash and depending on its value. If the certificate's value is less than $25, it would not be subject to taxation. If it's a gift card to your favorite clothing or electronics store in an amount greater than that, your boss must treat it the same as cash for tax purposes.
Like a gift card for a specific item, some tangible property might not be taxable, but the dollar limit still applies. If the value of the gift is $25 or less, it's tax-free. The IRS calls this "deminimis" or "of limited value." This would generally include things like a holiday turkey or a gift basket. If the gift is a flat-screen TV, it's taxable to you at fair market value. The value is added to your W-2. At the end of the year, you would pay taxes on it according to your regular tax bracket, along with your regular income.
Tips for Employers
It can be disconcerting to give your employee a $1,500 Christmas bonus only to realize that you've actually only given her $975 and you must send the balance to the IRS. The federal government's logic is that if she did not work for you, you would not be writing this check to her. Therefore, if you run a small business and have a personal relationship with your employee, gifts made from you to her might be exempt if they don't come out of your business account. If you want to reward employees during the holiday season, confer with your accountant or a tax professional to find out how to make it work best for both of you.
- "Jacksonville Business Journal"; Bonus Time: Holiday Gift Gives Many Happy Returns; Dolly Penland; December 2004
- "Bookkeeping Tips"; Which Employee Bonuses, Prizes and Awards Are Taxable -- And Which Taxes Must You Withhold?; The American Institute of Professional Bookkeepers
- InConcert Financial Group: Year-End Bonuses, Gifts, Prizes, and Awards...What's Taxable? What's Not?
- IRS.gov: Publication 15
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