Bonuses: Why They Must Run Through Payroll

Handing out a bonus is one of the best ways to recognize your team’s hard work. Whether it’s a holiday thank-you, a performance reward, or a surprise incentive, employees love to know their efforts are valued. But here’s the part many business owners don’t realize: a bonus isn’t just a gift — it’s taxable income. That means every bonus must go through your payroll system, just like a regular paycheck.

Why Bonuses Must Go Through Payroll:

• Tax compliance: The IRS and state agencies classify bonuses as wages. That means income tax, Social Security, Medicare, and state payroll taxes all apply. 

• Accurate records: Processing bonuses through payroll ensures they appear correctly on pay stubs, W-2s, and any reports tied to employee wages. 

• Protecting your employees: If bonuses are handed out “off the books,” employees may face unexpected tax issues later when filing their returns.

Cash, Gift Cards, and Other Perks Still Count 

It’s perfectly fine to hand out cash, checks, or gift cards as a form of bonus. In fact, many employees appreciate these the most. However, the value of those items must still be run through payroll. The IRS considers them taxable wages, and they need to be reported so payroll taxes are withheld correctly. Hamm Accounting Firm LLLP helps business owners process these types of bonuses properly so you can reward your employees while staying in compliance. 

A de minimis benefit is a small, occasional perk that’s so minor it would be unreasonable or impractical to track for tax purposes. Holiday turkeys, occasional snacks, flowers, or event tickets can qualify and are generally not taxable. But cash, gift cards, or anything equivalent to cash are never de minimis and must run through payroll. The IRS has even ruled that items.

If you’re planning bonuses this season, contact Hamm Accounting Firm LLLP — we’ll make sure they’re recorded correctly the first time.

Written by Melissa Crowe, Senior Bookkeeper, Hamm Accounting Firm LLLP