Can You 1099 an Employee for a Bonus? - Welcome to 1099-etc. Your all inclusive payroll suite! (2024)

Can You 1099 an Employee for a Bonus?

Bonuses are a different form of payment and are subjected to their own tax and wage rules. In short, employee bonuses are always taxable as employee benefits and are therefore subject to employment taxes. Additionally, employers must include bonus amounts in calculating unemployment taxes and FICA taxes.

Here is the basic run down of the rules for reporting compensation, including bonuses paid to employees vs. independent contractors:

1. If the recipient is an employee, the employer should always report wages, salaries, fees, bonuses, commissions, tips and other compensation as income on the employee’s W-2, not on a 1099.
2. If the recipient of the bonus is an independent contractor, then the bonus is reported as part of the compensation paid to the independent contractor for the services that they provide. If this total is more than $600, then the payer needs to prepare a 1099-NEC for the independent contractor, and that 1099-NEC must include the total amount paid to the worker. This is where it gets a little bit complicated. The payment should probably be part of the contract between the payer, and those terms could be a cause for the IRS determining that independent contractor is an employee. Thus, the employer would be subject to their share of the employment taxes.

For more information regarding the rules for determining whether the recipient is an employee or an independent contractor/self-employed individual see the IRS flyer regarding the topic.

For more information on the treatment of bonuses paid to employees see the IRS Publication 525.

How are Bonuses Taxed?

Bonuses may also be considered as supplemental wages because they are not included in regular pay. There are certain rules for how withholding taxes must be calculated depending on how the bonus is paid.

• When bonuses are combined with regular wages, employers must withhold federal income tax as though the total were a single payment for the regular payroll period.
• If a bonus is provided in a check separate from regular pay, you can either withhold a flat tax of 22% or add the bonus to the employee’s regular pay and withhold as though it were a single payment.

Tax Benefits to Providing Bonuses

When an employer gives a bonus, they receive a business tax deduction. Cash bonuses are generally regarded by the IRS as tax-deductible, as long as the payment was provided as additional compensation, not as a business gift. However, bonuses are not considered deductible expenses for certain partnerships, sole proprietorships, or limited liability companies (LLCs) because the owners, members, and partners in these businesses are considered to be self-employed. You can find more information about this in Publication 525, which is linked above.

Filling Out 1099s with AMS

While you will not need to handle a 1099 form when providing bonuses, you’d be surprised by how many businesses need to use 1099 forms with some regularity. Even if all the folks who work for you are employees, you may need to issue a 1099 for occasional contracted work – a website redesign, a new office floor, or something else your company cannot provide. In all of these cases, you should ensure you have access to a 1099 filing software. Luckily, the primary tool in the Advanced Micro Solutions suite includes support for both W-2 and 1099 forms. All you have to do is enter the correct information.

If you’re interested in trying ourW-2/1099 filer, consider checking out our free software demo. We’ve found the following features to be most useful to our users.

• A Common Payee File allows the user to select a Payee across payers/1099 forms without having to type in the same information multiple times
• Entering information is easy, and the entry screen resembles actual forms
• Data is automatically saved through the 1099 software whenever a new record or form is accessed
• Prints Tables and Worksheet Reports, along with Client Letters, Recipient Lists, and Mailing Labels
• The Table Report generates hash totals of SSNs and TINs for checking data entry accuracy

So, can you 1099 an employee for a bonus? No, you cannot. But you should always have access to a software tool that supports 1099 forms. With a 1099-supporting accounting software tool in your back pocket, you can rest assured that you’re prepared for whatever business-related challenges come your way.