- Any employee paid wages and taxes collected upon, regardless of the amount, must receive a W-2 by January 31 following the end of the reporting tax year on December 31. Bonus compensation reports on the W-2 in the same box as wages and are added into the total wages for the year. The form also includes fields for reporting federal income taxes, Social Security and Medicare taxes, state, local and city taxes, and state disability insurance fees withheld from the employee's payroll.
- Federal income taxes for bonuses, because they are not part an employee's regular pay, often calculate at a higher tax rate than the employee's normal withholding rates. Every year, the IRS provides new tax withholding tables for employers. Employers use this to calculate tax withholdings for employees based on deductions from the employee's IRS Form W-4, Employee's Withholding Allowance Certificate. Bonus tax withholdings are calculated under "supplemental" wages and the IRS offers several different ways to calculate these taxes. The simplest method, the flat rate method, uses a tax calculation of 25 percent, at the time of publication.
- The IRS does not set a limit on payments to employees for bonuses or any other form of compensation before the employer has to complete a W-2. Filing a W-2 is a legal requirement, without exception, regardless of the amount of an employee's yearly pay or bonuses. Any payments to employees -- whether bonuses, commissions, fringe benefits, overtime, severance pay, prizes, back pay, retroactive pay or sick leave pay -- must be included in the taxable wages portion on the W-2 after removing pre-tax contributions.
- The IRS permits certain applicable pretax deductions for qualified retirement accounts, 401k, employee paid health and dental insurance premiums, flexible dependent-care and medical withholdings. These deduct from the gross wage before the calculation of any federal income tax on the wages.