Bonus Definition

• While a wage or a salary comes in a specific amount according to hours worked or according to a monthly, biweekly or weekly pay schedule, a bonus is a type of pay that comes in a less structured manner. It usually comes on top of such regular employee payments, and the exact numerical value of such a payment comes at the employer's discretion. Such bonus payments usually come as a result of a high level of performance, either for the employee in particular or for the company in general.
  
  

Income Tax

• When it comes to income tax, the Internal Revenue Service does not differentiate between bonus payments and normal wage or salary payments. For this reason, the Service requires employers who pay bonuses to withhold tax from bonus payments just as they would for normal wage or salary payments. The fact that this may result in a higher tax payment for a particular pay period does not matter.
  
  

Employment Tax

• When employers hire hourly or salaried employees, whatever they pay those employees becomes subject to employment tax. As with income tax, employment tax applies to all types of employee earnings, including bonuses. As of 2011, this means that the employer must pay 6.20 percent in taxes under the Federal Insurance Contributions Act for the first $106,800 in payment, 0.8 percent in taxes according to the Federal Unemployment Tax Act for the first $7,000 in payments and 1.45 percent in Medicare tax for all payments.
  
  

Bonus Drawbacks

• In some cases, employers may actually do their employees a disservice by issuing bonuses. This is because federal income taxes come in graduated income brackets. For instance, if a single woman makes a salary of $34,000 per year, she must pay 15 percent of that in income tax, making her after-tax income $28,900. If she receives a bonus of $600, that extra income puts her into the 25 percent tax bracket, which means that she receives an after-tax income of $25,950. Thus, by giving her a bonus, her employer lowers her income.