State of the Economy

• Before the economy took a turn for the worse, bonus rewards were commonplace. However, although many employers still provide their employees with incentive payments and year-end bonuses, keeping their workers employed is probably the biggest concern -- especially as the national unemployment rate as of August 2011 was 9.1 percent, according to the Bureau of Labor Statistics.
  
  

Supplemental Wages

• The IRS requires employers to withhold federal employment taxes on their regular and supplemental wages. Regular wages include salaries and tips. Supplemental wages include bonuses, overtime compensation, severance pay, pay increases made retroactively and sick or vacation leave payouts. The IRS taxes employees' supplemental wages differently than regular wages, and those with supplemental earnings over $1 million annually are subject to higher taxes than the majority of other employees with supplemental wage earnings.
  
  

Flat-Tax Withholdings

• Employers are required to withhold a flat 25 percent of an employee's bonus as a supplemental wage tax. Supplemental wage earnings are also subject to federal employment taxes, which include Medicare, Social Security and federal unemployment or "FUTA" taxes. For 2010, employers were required to withhold approximately 15.3 percent from each of their employee's paychecks for employment taxes. Thus, an employee who was fortunate enough to receive a bonus in 2010 was required to pay the IRS 40.3 percent of her bonus. However, depending on her tax bracket, deductions and tax withheld during the year, she may have had to pay less than the 40.3 percent rate.
  
  

Bonus Forms

• The IRS requires employers to report their bonus payments and regular wages on their W-2 annual tax forms. They must deduct any other taxes, as reported on each employee's W-4 Form, Employee's Withholding Allowance Certificate. Although bonuses are typically not taxed at a higher rate than non-supplemental earnings, employers are required to withhold a flat 25 percent in addition to withholding employment taxes.