There are two key decisions that payroll administrators must make about paying bonuses: (1) how bonuses are classified and (2) the pay period used to pay them. Each decision is described in detail below.

In short, Greenshades recommends that bonus earnings be classified as "Supplemental". If the employer is operating in jurisdictions where the withholding on supplemental wages is calculated on an Annualized basis, then Greenshades would further recommend using Special Payrolls with pay periods that accurately reflect the time period that the bonuses were earned.  
 

First Decision: Supplemental vs. Regular Aggregate vs. Regular Cumulative 

Earning codes within Greenshades Online may be classified as a specific type of wages.  The first decision you must make is whether to classify your bonus earning codes as either "Supplemental" or "Regular". 

"Supplemental" earnings refer to any earnings paid to an employee above their regularly earned wages. Per the IRS, the following all qualify as supplemental wages:

• Bonuses
• Most Commissions
• Reported Tips
• Overtime pay
• Accumulated sick leave
• Severance pay
• Prizes and Awards
• Payments for non-deductible moving expenses
• Back pay
• Retroactive pay increases

 

Most employers will want to classify their bonus and other supplemental earning codes as "Supplemental" within the Greenshades Payroll system. Some employers, however, may wish to keep these earnings classified as "Regular". The different options and their ramifications are described below.

 

Option 1: Classifying Bonus Earnings as Supplemental Wages 

Most employers will classify bonus and other supplemental earning codes as "Supplemental" within the Greenshades system. This will instruct Greenshades to withhold tax from these earnings according to government regulations on supplemental earnings. For instance, the IRS mandates that Federal Income Tax be withheld from supplemental earnings at a fixed withholding percentage of 22% for the first $1 million of earnings and then 37% of any earnings above $1 million. Various state and local governments have their own income tax withholding rates specific to supplemental pay.  

To mark an earning code as "Supplemental" within the Greenshades system, navigate to Settings -> Payroll -> Codes and then create an earning code while specifying the Wage Type as either "Supplemental" (for most of the types above) or "Backpay Supplemental" (for backpay bonuses in particular).

 

 

Option 2: Classifying Bonus Earnings as Regular Wages (with Annualized Withholding Calculation)

Some employers may choose to pay bonuses alongside regular wages and wish to see similar tax withholding on both the regular earnings as well as the supplemental earnings. The IRS refers to this as the "aggregate" method, wherein the bonus and the regular pay are considered in aggregate when determining tax withholding. Greenshades will again follow IRS guidelines for calculating tax withholding for regular earnings.  Per IRS guidelines, Greenshades will first calculate the employee's annualized earnings by multiplying the regular wages times the number of expected paychecks in a year. For instance, an employee with $2,000 of earnings on a bi-weekly paycheck (26 paychecks per year) will be calculated to have $2,000 * 26 = $130,000 of annualized earnings.  This annualized earning amount will be used to determine the amount of tax withheld from the paycheck. 

For employers who wish to use the Aggregate Method, they will choose a "Regular" Wage Type from the Greenshades earning code setup (or "Backpay Regular" for an earning code that is specifically for backpay), instead of the "Supplemental" option chosen above.  

 

 

Option 3: Classifying Bonus Earnings as Regular Wages (with Cumulative Withholding Calculation)

Sometimes, employers will want to classify their bonuses as regular earnings but find that the Annualized Taxation calculation is producing abnormally high tax amounts. This is commonly the case with employees that earn relatively lower base pay and occasionally receive large bonuses (such as commission workers or transportation workers who receive large per-haul bonuses). For such employees, the IRS allows for an alternate withholding method: the Cumulative withholding method. 

With the Cumulative method, Greenshades will looks at the total pay received during the year in order to estimate what tax is appropriate on all earnings. In other words, the Cumulative Calculation Method does not assume that the current check is typical for the employee in question, and instead uses the employee's total year-to-date pay as a better indicator when calculating tax withholding.   This is described in much more detail, along with examples, in the separate article on Different Tax Calculation Methods.

Please note that the employee must request that their withholding calculation method is switched from the Annualized method to the Cumulative method. 

To classify bonus earnings as regular wages, follow the steps above to mark the Wage Type as "Regular". Then, once the employee has requested that their tax be withheld on a cumulative basis, check the "Cumulative Tax Calculation" box on the employee card within Greenshades Online. 

 

Second Decision: Choosing a Pay Run for the Bonus Earnings

Once you have decided how to classify the wage type for your bonus earnings, you must then decide whether to include bonuses as part of your normal payrolls or if you will make a special payroll for the bonus payouts. 

The decision on where to include your bonus earnings will impact how the earnings appear on employee checks and, under certain circumstances, will also impact the tax withholding of the bonus earnings.

 

Normal Payroll vs Special Payroll: How Employees Receive Their Bonus

Including employee bonus payments along with regular earnings in your normal payrolls means that employees will see the bonus as a separate line-item on their regular paycheck, next to their wages.  Including employee bonus payments in a special payroll means that employees will receive a check or paystub with their bonus earnings that is separate from their normal check / paystub.  It is often a matter of company preference as to whether you want your employees receiving their bonus on the same paycheck as their other earnings or on a separate paycheck. 

 

Normal Payroll vs Special Payroll: How Tax Withholding is Calculated

If the tax withholding is calculated using a flat percentage supplemental rate (such as the supplemental rate for the federal government and most states/locals), then using a normal payroll vs a special payroll will make no difference in how tax withholding is calculated.

However, if the tax withholding is calculated using Annualized withholding calculations, then the pay period of your payroll will factor into the estimate of annual wages and therefore factor into the tax withholding calculation.  This will be the case for:

• Bonuses marked as Regular Pay with Annualized Taxation (one of the options from above)
• Bonuses marked as Supplemental Pay and paid to employees working in a handful of state and local governments where Supplemental withholding rates are based on Annual Taxation methodology 

Employers who find themselves in one of these two scenarios will usually prefer to use a Special Payroll to pay bonus earnings so that they can specify the duration of the pay period to match how the bonus was earned instead of being forced to use the pay period of their regular payrolls. 

As an example, consider an employee who is paid a weekly salary of $2,000 and receives a quarterly bonus of $10,000.  In this example, the bonus earning code has been set up as Regular Pay and the employee has not opted for the Cumulative calculation method (the default Annualized calculation method will be used). If you pay this employee their bonus as part of their regular weekly paycheck, then then Greenshades will calculate the employee's annualized earnings as $12,000 (this check's regular pay) * 52 (weeks in a year) = $624,000 per year. Greenshades will then withhold tax from this bonus check under the assumption that the employee is a high earner, which will result in a higher amount of tax withholding. 

Instead, you may pay this quarterly bonus on a Special Payroll and ensure that the pay period is set to a quarterly pay period.  In that case, Greenshades will calculate the annualized earnings as $10,000 (the amount on this Special Payroll) * 4 (quarters in a year) = $40,000 per year. This will result in a much lower tax withholding calculation for this bonus.

 

A Special Payroll and its Pay Period may be designated within Greenshades Online by navigating to Payroll -> Run Special Payroll.  Below is the illustration of a Special Payroll that has been configured with a Semi-Annual Pay Period: 

 

Again: if the earning code for the bonus has been classified as a Supplemental Wage type (as recommended), then the pay period will be ignored for the calculation of Federal Income Tax and most state/local income taxes. Using a different pay period for the Special Payroll will only cause a difference to tax withholding calculations in the two cases that were bulleted earlier in this section.

 

Splitting Bonus into Multiple Checks

Some employers may have a scenario where their bonus is being calculated according to Annualized Taxation rules, but they do not wish to adjust the pay period on their Special Payroll to accurately reflect the period in which the bonus was earned. In those cases, employers may split the bonus amount across multiple Special Payrolls, each with a smaller portion of the overall bonus. This is not a recommended Greenshades practice. Most employers choosing this option are doing so because they are accustomed to workflows from non-Greenshades payroll software which did not have features described earlier in this article. The workaround of generating multiple checks is generally more work for payroll administrators and more confusion for employees, neither of which are necessary with Greenshades Payroll. 

In this method, employers will leave bonus earnings as "Regular" wage types (which the default Annualized withholding method), and then use the Special Payroll method to generate bonus checks, but will split the bonus into smaller amounts which will each individually result in a lower estimated annual income and thus lower income tax withholding. For instance, a $10,000 bonus can be split into five separate $2,000 bonus checks. Each check will have individual calculations for estimated annual earnings and income tax withholding. 

 

What is Right for me? 

For most employers, Greenshades advises to mark bonus and other supplemental earning codes as Wage Type "Supplemental." This will withhold tax at a flat percentage for the Federal government and most other taxing agencies.

If you instead keep bonus earning codes registered as Regular Pay, or if you are paying employees in a taxing agency where withholding on supplemental pay is still calculated according to the Annualized methodology, then Greenshades recommends using Special Payrolls and setting the pay period to reflect the period of the bonus. 

If you issue large, irregular bonuses (high commissions or job-completion bonuses) to employees with a low rate of pay, and are noticing an abnormally high amount of withholding on those bonuses, then Greenshades recommends that you have a conversation with those employees to see if they want to change their tax withholding calculation from the Annualized method (the default) to the Cumulative method.