Bonus Checks

[imjulier]

Thought I'd try and see if anyone here knows much about payroll. I don't which is why I generally don't do payroll and I recommend that all my clients use a payroll company becuase of the nuances/issues that arise when you don't do payroll all the time. However, clients do what they want. So client issued a bonus check in December through their QB payroll but instead of issuing it as a bonus chack and withholding 25% as you are supposed to, they issued it as if it was a regular payroll check and hardly anything was withheld. Now, they want to know if they should correct it because they just became aware that they should have withheld 25%. They only have one employee. I say no, its probably not worth the hassle but next year, do it right. They are questioning my judgment. Does anyone here want to give me your opinion?

Thanks,

Julie R

[Karen Lee]

Julie:

Bonus $ are subject to all payroll taxes (>$25.)So you client has probably issued correctly.

Karen

[BulldogTom]

The only way this would come back to bite them is if the employee has underwithheld so much that he owes taxes and cannot pay, and then to try and get out of it, tells the IRS that the company did not withhold enough. That would bring the IRS down on them.

Of course, there is also the possibility of a random payroll audit revealing the issue. But if the employee has enough withheld and doesn't make a stink about it, I would let this one go. If you have access to the employee records, take a look at the income and the withholding and see if it looks like there is going to be a problem.

Personally, I would just advise the client to do it right next time and move on.

Tom

Lodi, CA

[imjulier]

Tom-

You confirmed what I was thinking. That is the response I gave to the client so we'll see if I ever hear about it again. Hopefully not!

Julie

[Tax Prep by Deb]

The only way this would come back to bite them is if the employee has underwithheld so much that he owes taxes and cannot pay, and then to try and get out of it, tells the IRS that the company did not withhold enough. That would bring the IRS down on them.

Of course, there is also the possibility of a random payroll audit revealing the issue. But if the employee has enough withheld and doesn't make a stink about it, I would let this one go. If you have access to the employee records, take a look at the income and the withholding and see if it looks like there is going to be a problem.

Personally, I would just advise the client to do it right next time and move on.

Tom

Lodi, CA

Tom,

I had a client some years ago who's company that they worked for was not holding out enough even though client had correct info on the W-4. This happened two years in a row so I looked deeply at what their company was doing and they were totally messed up and seemed not to want to fix it.

I contacted IRS in behalf of my client to see what could be done and I was informed that basically IRS wouldn't get involved because when it comes to withholding the employee can go in and make changes at any time. Finally enought employees complained and the problem was corrected.

So I too would recommend leaving this alone. It has been my understanding that when it comes to bonuses, whatever you currently have on file for withholding is what you would use. I even have some clients that will claim exempt on the bonus to retain the maximum amount, and then go back to the normal way of withholding. I don't advocate this, but it just goes to show that there are many variables.

Just my two cents worth,

Deb!

[Medlin Software, Dennis]

The employer should at all times do things legally allowed and/or required. IRS Publication 15 outlines the allowable methods for handling "supplemental wages". Hard to be exact without more detail.

"they issued it as if it was a regular payroll check"

Based only on this statement, the employer was wrong. It is not an allowable option to simply cut another check, using the regular payroll frequency calculations. While the employee is responsible for having proper tax withholding and filing, there is NO GOOD that can come from an employer doing things cowboy style...

Please refer to Pub 15 or get a paid, written, E&O insured, professional opinion...

(Note, there is no mention of what to do if supplemental is exactly 1mil...)

[Terry D EA]

The employer should at all times do things legally allowed and/or required. IRS Publication 15 outlines the allowable methods for handling "supplemental wages". Hard to be exact without more detail.

"they issued it as if it was a regular payroll check"

Based only on this statement, the employer was wrong. It is not an allowable option to simply cut another check, using the regular payroll frequency calculations. While the employee is responsible for having proper tax withholding and filing, there is NO GOOD that can come from an employer doing things cowboy style...

Please refer to Pub 15 or get a paid, written, E&O insured, professional opinion...

(Note, there is no mention of what to do if supplemental is exactly 1mil...)

I totally agree. Had the employer listed the bonus checks correctly under payroll items in QB, then the QB payroll program would have calculated it correctly. For future reference, if the employer wants to give a bonus in a specified net amount, they are allowed to gross up the bonus to cover the withholdings. It appears by your statement there was only one employee affected and I would advise them to follow the regulations in the future. I can't offer any way to correct this. Backup withholding I think only applies to FICA taxes so that would not be an option either. This is why companies shouldn't do their own payroll

[JohnH]

Approximately how much was the bonus?

[BulldogTom]

The employer should at all times do things legally allowed and/or required. IRS Publication 15 outlines the allowable methods for handling "supplemental wages". Hard to be exact without more detail.

"they issued it as if it was a regular payroll check"

Based only on this statement, the employer was wrong. It is not an allowable option to simply cut another check, using the regular payroll frequency calculations. While the employee is responsible for having proper tax withholding and filing, there is NO GOOD that can come from an employer doing things cowboy style...

Please refer to Pub 15 or get a paid, written, E&O insured, professional opinion...

(Note, there is no mention of what to do if supplemental is exactly 1mil...)

We agree that it should have been done correctly. I think everyone on this board knows that. I think we are all ASSUMING (a dangerous thing to do) that the client did not know the correct way to prepare a bonus check and just treated like any other paycheck.

So, would you correct it? How do you get the withholding from the employee if you made that mistake? What if the check is long gone and cashed?

Tom

Lodi, CA

[taxit]

We run over 40 payrolls. The bonusdoes not become an issue unless its rather large. Most of the small business payrolls that issue a bonus, issue less than $500.00. I would not correct this. However, if it was a large bonus, the employee may owe additional tax when they file their return. The employer should make sure to run the bonus check correctly in the future.

[imjulier]

Thanks to all for your input and information. It was one employee with an $800 bonus. I told them to use this as a learning experience and to do it right next year. Not perfect, but then what small business is. Again, thanks for the information.

Julie

[JohnH]

So instead of $200 being withheld, there's something on the order of $100 or so withheld. Nothing to worry about here.

And given that IRS is delaying processing some returns until Feb, if the employee is an itemizer then they have already received part of their refund early. Or if they owe, the small difference would not by itself trigger an estimated tax penalty. Tell the employer to forget about it and move on.

[Pacun]

Under the wherewithal-to-pay doctrine, withholding should happen when the IRS is best able to collect from the taxpayer.

If I get a million dollar bonus, the best chance for the IRS to collect money from me is when I am receiving it. When I get an $800 bonus, the IRS will be able to collect from me any time. So, in this case, you don't have to worry about anything and just tell them to use bonus calculations for the future. Even if the taxpayer owes money, they IRS will not waste time and effort for such small amount.

[Terry D EA]

What amazes me is the number of people who think they can tell what the IRS will do or how they will act in a given situation. This is not directed at anyone in particular. But, I have seen the IRS stand strong and intimidate a client for 5.00 and add interest and penalties because the IRS (who never makes mistakes), could not calculate the ETIC credit amount correctly. After several attempts with various documentation, they refused to budge, isisted they were right and it was in the best interest of the client to pay the $5.00 plus interest and penalties. I would never go out on a limb and say what position the IRS or any other taxing authority will take.

In this situation is may be unlikley that the IRS will catch up with this but I would always advise the client of what he/she should do to correct the error to avoid any unnecessary heart ache and expense. Here is another scenario, a client owed the IRS 1600.00 in 2004. He took a stand and protested paying taxes (put this guy at the top of the DA client list)and that amount has turned into 8,000.00 dollars. Now I ask, which would you rather have to pay?

Bottom line, any taxing authority can collect on any amount they claim is due within the statutes and make the tax payers life a living hell for non payment.

[Pacun]

I was writing a long reponse to your post but I will limit to say: Very nice comparison you made: An employer who withheld a bit less than required with a guy who protested paying taxes.

[Medlin Software, Dennis]

It was interesting that the IRS posted the 2011 calculations "before" the bill was signed into law... I saw one news item early on where the IRS had given the politicians the truth, that by a certain date (maybe even Dec 17), they were going to publish with what they had. It may well have been a case of the tail wagging the dog. No matter what, all that mattered to me was getting the calculations (no matter what they were) out.

The $5 example reminds me of my first accounting textbook which had a nice blurb about a newly minted accountant researching and researching until they found a <$1 many year old imbalance. Said newbie went to their boss to show how the hard work paid off, and was fired on the spot for wasting time finding $1...

[kcjenkins]

The main thing to take into account is that the 25% withholding is intended to cover the fact that a large yr-end bonus can throw off the withholding totals significantly. So if the bonus is significantly large compared to the normal paycheck, it should be used. If the bonus, however, is just the equivalent of one extra check, or even less, as is often the case, then treating it as just another paycheck should not be a problem. Even if you 'teach' the client the right way to treat a bonus, be sure that you also PRAISE him for processing it through the payroll procedure, rather than just cutting a "Christmas Gift" check, as so many do!!!!