Sense with Cents

I get asked this often: how do I create a separate bonus check? The answer is simple — don't, with one exception. Many employers want to issue a separate check to keep the bonus visually separate from regular pay. Some believe it gets the employee more money. The truth is the opposite. A separate check means the employer must withhold at the supplemental withholding rates, which means the employee takes home less of the bonus.

The easiest and most beneficial method is to add the bonus to the next regular pay period. This allows the bonus to be aggregated with regular wages for withholding calculations, resulting in more reasonable and likely more accurate withholding.

Use your own common sense. If the bonus is a small percentage of an employee's annual pay, just add it to their next regular check. If the amount is say 10% or more of their annual pay, let the employee know the bonus is coming soon so they can make their own decision about their withholding. (The W-4 is an entirely separate topic.) This is another case where keeping payroll simple serves everyone better — similar to my philosophy on clergy housing allowance and S-Corp health insurance: understand the rules, then take the simplest compliant path. The same logic applies to jury duty pay, which is best treated as a discretionary bonus. And remember, there is no such thing as a payroll crisis — even bonus time.