Tax Rules for a Holiday Bonus

Just like many other professions, the holiday season is a common time of the year for families to reward their household employee with a bonus. And since your nanny or senior caregiver is probably buying gifts for family and friends, the timing works out very well for them. During this time of the year, we often get questions on how to handle a holiday bonus from a payroll and tax standpoint, so here's what you need to know.

A bonus may seem like it should be handled differently than your caregiver's standard pay, but the IRS considers a bonus to be just another form of taxable compensation. Therefore, you should add the bonus to your caregiver's normal gross wages and withhold taxes accordingly.

It's a good idea to give your employee a heads up that their income will be taxed at a higher rate than usual for the pay period that includes the bonus. This is because the IRS tax tables assume their new gross wage amount is a raise rather than a one-time bonus. Because the tax tables are part of payroll law, there is no way to deviate from them to reduce your employee's taxes.

However, the good news is the higher tax withholding is temporary and is treated as a pre-payment toward your caregiver's tax liability for the year. So, when they files their tax return, it will be recouped in the form of a larger refund or a lower tax payment, depending on their situation.

If you would like to calculate the taxes that will be withheld from your employees bonus, please feel free to use our Employee Paycheck Calculator.