Processing bonuses correctly is essential for accurate tax withholding and compliance. Here’s how Greenshades helps classify bonuses and determine the best pay period for payout.
Bonus Classification: Supplemental vs. Regular Wages
Greenshades Online allows earning codes to be classified as either Supplemental Wages or Regular Wages impacting tax withholdings:
Option 1: Classifying Bonus Earnings as Supplemental Wages (Recommended)
✔ Includes bonuses, commissions, severance, and overtime per IRS guidelines
✔ Subject to flat tax withholding rates:
- Rates are as follows:
- 22% for the first $1 million
- 37% for earnings above $1 million
📌 How to Configure in Greenshades:
- Navigate to Settings → Payroll → Codes
- Create an earning code and select "Wage Type: Supplemental"
- Choose "Backpay Supplemental" for backpay bonuses
This method ensures tax withholding is aligned with federal and state requirements.
Greenshades factors bonus payments into our calculations for Regular Rate of Pay and adds it to any overtime payments for hourly employees.
Option 2: Classifying Bonus Earnings as Regular Wages (Annualized Withholding Calculation)
✔ Uses the IRS "Aggregate" method for tax withholding
✔ Calculates tax based on projected annual earnings
📌 How to Configure in Greenshades:
- Select "Wage Type: Regular"
- Choose "Backpay Regular" for backpay bonuses
This method may lead to higher withholding if bonuses significantly increase an employee's projected income.
Option 3: Classifying Bonus Earnings as Regular Wages (Cumulative Withholding Calculation)
✔ Best for commission-based employees with variable earnings
✔ Withholding is based on year-to-date earnings, preventing over-withholding
📌 How to Configure in Greenshades:
- Select "Wage Type: Regular"
- Navigate to the employee's profile and check "Cumulative Tax Calculation"
Choosing a Pay Run for Bonus Earnings
Employers must decide whether to include bonuses in regular payroll runs or process them separately using Special Payrolls. Greenshades supports both:
- Normal Payroll – Bonuses appear as a separate line item on regular paychecks
- Special Payroll – Bonuses are issued on a separate paycheck, which may result in more accurate tax withholding
Tax Withholding Considerations
For supplemental wage tax withholding:
- Flat Rate (IRS 22%) – No difference between Normal and Special Payroll
- Annualized Withholding – The pay period impacts estimated annual wages and withholding
Employers in states using annualized supplemental tax rates should opt for Special Payrolls with accurately defined pay periods.
📌 Example: The Impact of Pay Period Selection
Let’s say an employee earns $2,000 weekly and receives a $10,000 quarterly bonus.
✔ If paid in a regular weekly payroll:
- The bonus and regular wages total $12,000 for that pay period
- Using the IRS aggregate method, Greenshades estimates annual income as:
📌 $12,000 x 52 weeks = $624,000
This inflated estimate leads to higher withholding for that single paycheck
✔ If paid using a Special Payroll with a quarterly pay period:
- The bonus is assessed as a standalone quarterly payment
- Annualized income estimate becomes:
📌 $10,000 x 4 quarters = $40,000
Withholding aligns more accurately with the employee’s actual earnings
Avoiding the Pitfalls of Splitting Bonuses Across Multiple Checks
🚫 Splitting bonuses across multiple checks to lower withholding can create complex payroll tracking
✔ Instead, Greenshades recommends:
- Classifying bonuses correctly
- Using Special Payrolls with defined pay periods
- Enabling Cumulative Withholding for employees with irregular, high-value bonuses
Optimize Bonus Payroll with Greenshades
For most employers, Greenshades recommends:
- Classifying bonuses as "Supplemental" to apply flat withholding rates
- Using Special Payrolls with defined pay periods for annualized taxation jurisdictions
- Enabling Cumulative Withholding for employees with irregular, high-value bonuses
By leveraging Greenshades' intelligent payroll configurations, businesses can ensure accurate taxation, reduce administrative workload, and provide a seamless payroll experience for employees
