Bonuses can be either percentage-based or flat-rate and have specific tax implications for both the company and employees. The cost of bonuses can generally be deducted if they're deemed compensation, but timing and employee relationships affect deductibility. Bonuses are subject to standard taxes and withholding rules, with tax-free bonuses being essentially impossible. Click here for article.
Bonus Calculation: Bonuses typically range from 3-5% of annual salary for clerical staff, with higher percentages for managers and executives. They can be either percentage-based or flat-rate.
Tax Deductibility: Bonuses can be deducted if they are considered compensation and not gifts, with accrual-method businesses benefiting from the 2 1/2-month rule for deductions.
Tax Withholding: Supplemental wages, including bonuses, are taxed at standard rates with options to withhold either a flat 22% or use the aggregate method, depending on how the bonus is paid.
Tax-Free Bonuses: Bonuses are never truly tax-free; even if the employer covers the tax, it is considered additional taxable income for the employee.
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