We know that the holiday season is coming down the home stretch, but there have been some amazing stories of companies whose generosity has gone above and beyond the call of duty. Two out of three companies say they will give some sort of holiday bonus, but St. John Properties in Maryland surprised their employees beyond belief with handing out $10,000,000 in holiday bonuses
https://bit.ly/36B7pfL. The bonuses were handed out based upon your length of service with the company. So, even though the average employee bonus was $50,000, the lowest bonus was $100 and one employee who worked for the company for 44 years received a $270,000 bonus? anta, do you hear us calling you?
The news continued over the past week with a giant insurance company called the Integrity Marketing Group who paid out a $50,000,000 bonus to its some 7,500 employees, but their bonuses were skewed to the overall performance of the individuals rather than tenure or the overall performance of the company. So, should all companies be offering holiday bonuses as they rack up record profits, or is this a pot of gold that we will never see at the end of the rainbow?
To put this into perspective, more companies are offering holiday bonuses than they did in the past, but the amounts they are handing out are far and few between the companies mentioned above. 10% of the companies say they will do bonuses based solely on how the company performs. This would seem to be the measure that would connect employees together because everyone is rooting for the same outcomes, but 24% of companies now say they will do bonuses based upon the performance of the individual employee. It would make you think that team performance would go down, but this isn’t unlike what happens in professional sports today where you get paid based upon how the market judges your performance. The staggering statistic in here is that the amount of companies that say they will do just a nominal holiday bonus for under $250 has increased by double digits versus a year ago.
How Are Bonuses Taxed?
There are generally two methods to how bonuses will be taxes, and you better be certain you check with payroll, so you don’t under withhold or over withhold your taxes.
The Percentage Method
Your employer can simply withhold that flat 22% that’s applicable to all supplemental wages under $1 million. The IRS refers to this option as the “percentage method.” This would result in a withholding of $660 if you receive a $3,000 bonus.
This rate applies even if your regular wages fall into a tax bracket that’s greater than 22%—or less. The issue is that just because your company only withholds 22% doesn’t mean you won’t owe more than 22%.
The Aggregate Method
As the name suggests, this option is more complicated. Let’s say your regular pay is $1,000. Your employer also gives you that $3,000 bonus, all in one paycheck.
Withholding is first calculated on your regular pay plus your bonus according to the aggregate method, based on the information you provided on your form W-4 and the IRS withholding tables. Nothing new here—your employer has been doing this with your regular pay all along.
Now the same rate of withholding is calculated on just your regular income. This figure is subtracted from the withholding on the total combined amount and the result is then withheld from your bonus.
As explained by the IRS in Publication 15, it works out like this: You might be subject to $300 withholding on the total combined wage and bonus income of $4,000. Withholding on your regular pay of $1,000 might work out to $50. Your employer would subtract that $50 from that $300 figure and would withhold $250 from your $3,000 bonus. Again, if for some reason your employer has withheld too much money, then you would get it back when you file your taxes.
What should you do with your bonus?
It’s never a good idea to be so flush with cash that it gets you to start thinking you are wealthier than you really are, so it’s important to have a game plan.
- Pay off all consumer or high interest debts
- Make sure you have three to six months of a cash reserve
- Fund your retirement plans before the end of 2019
- Then, get something small for yourself or grab an experience so you can enjoy the fruits of your labor
- If you are so inclined, donate some money to charity.
I’m not sure whether or not more companies will spread the wealth from the huge successes they are having in todays economy. A bonus is exactly what it is, a reward for a job well done. Congratulations to the employees who have worked hard this year, made your company a better place to work, and helped to drive bottom line results. I hope the employee bonus elf slides a holiday gift across your desk.