Which employee bonuses, prizes and awards are taxable—
and which taxes must you withhold?
Cash bonuses: Cash bonuses are wages subject to FITW, FICA, FUTA, and state and local taxes. When the bonus is paid separately from regular wages, or paid with regular wages but identified as separate, it may be treated as supplemental wages, and the employer withholds FIT at the flat rate of 25% for 2004. [ 26 CFR 31.3402(g)-1]
Important: The crucial factor in taxing bonuses is whether they are discretionary or nondiscretionary bonuses. For details on how to tax each kind, see the forthcoming December, 2004, issue of The General Ledger, the monthly technical newsletter for AIPB members ( www.aipb.org/general_ledger.html ) .
Prizes and awards: Prizes and awards must be included in wages and are subject to all taxes. But there are exceptions (see the forthcoming, December, 2004, General Ledger ).
Noncash prizes: Include the fair-market value on the employee's W-2. [Rev. Rul. 57-18, CB 1957-1, 35]
Nontaxable gifts: Turkeys , hams, champagne, flowers, fruit baskets, etc. generally are not taxable as a de minimis fringe benefit.
Taxable gifts: But, under a recent IRS guidance, a gift certificate, even if it can be used only for a designated item at a designated store and cannot be converted to cash, is taxable to employees. [26 CFR 1.132-6(e); TAM 200437030]
Parties. The IRS considers the cost of occasional parties to be nontaxable to employees and their families as a de minimis fringe— if the parties are infrequent and for the purpose of promoting employee health, goodwill, contentment, or efficiency. Examples include holiday celebrations, occasional cocktail parties and company picnics. In addition, such parties are fully deductible to the business (i.e., not subject to the 50% limit on business meals). [IRC §132]
For details on how and when to tax — or not tax — suggestion, safety, achievement and length-of-service awards, see page 6 of the forthcoming December, 2004, issue of The General Ledger ( www.aipb.org/general_ledger.html ).