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Ask SAM: How are bonuses calculated in income tax? | Ask SAM

Q: My employer gave us gift cards at Thanksgiving and again at Christmas, one for $25 and the other for $50. I looked at my pay statement and on 12/29 there was a statement showing I was paid $121 and some change. I don’t see how they can give me $75, then turn around and show that I was paid $121. I can understand normal wages, but in this case they only paid $75 for the two gift cards. How can they then turn around and say they actually paid more? Is this right?

I.W.

Answer: Yes, according to Schorr Johnson, director of public affairs for the N.C. Department of Revenue. Here is how he explained it:

As a general rule, all forms of compensation, including gift certificates as bonuses, are subject to income tax.

The taxation of gift certificates to employees works the same way as any other supplemental wages, i.e. the gift certificate is subject to federal income, Social Security, Medicare taxes, and when applicable, state income tax withholdings.

If an employer wants to give each employee a $75 gift certificate as a holiday bonus, the employer must “gross up” their bonus by determining the federal income taxes, Social Security and Medicare taxes, and state and local income taxes.

For example, assume the business is located in North Carolina and the supplemental wages are subject to the 2017 State income tax withholding rate of 5.599 percent. In addition, assume the employer applies a 25 percent federal withholding rate to the supplemental wages. Finally, assume the supplemental wages are also subject to the 7.65 percent Social Security and Medicare tax rate. Therefore, the total withholdings are 25 percent (federal income tax) + 7.65 percent (Social Security and Medicare tax rate) + 5.599 percent (State income tax rate) = 38.249 percent or .38249.

If the employer wants to give $75 to their employees after deducting taxes from the wages, the…

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