How are my employees bonus and commission checks taxed?
Bonuses and commissions are considered supplemental pay and are subject to supplemental withholding. Since FICA and Medicare do not have multiple rates, it is the federal, state and local income tax, which are primarily affected. Bonuses and commissions may be paid in the same check as regular earnings or separately. If they are paid on the same check, the entire earnings can be taxed as usual based on the applicable tax tables. If they are paid separately, special rules apply. Federal law requires that they be taxed either at the supplemental flat rate (currently 25%) of the earnings or according to the aggregate method. The aggregate method simply adds the supplemental earnings to the most recent (or current) earnings and taxes them together according to the tax table. The tax on the combined earnings is the amount that must be withheld on the two checks. Each state governs the applicable withholding rate for bonus payments.
