Your talent network sent you plenty of quality referrals, and you’ve acknowledged their efforts with bonuses and rewards. But there’s an important step you don’t want to miss — figuring out when and how to apply taxes to those payouts.
Here’s a quick overview of the tax implications of referral bonuses.
Are referral bonuses taxable?
The short answer is, generally, “yes.” Referral bonuses may indeed be subject to federal, state, and local taxes as well as social security and Medicare taxes. But it depends on how much referrers earn and whether or not they’re employees.
According to the Employer’s Tax Guide from the Internal Revenue Service (IRS), referral bonuses to employees are considered supplemental wages:
“Supplemental wages are wage payments to an employee that aren’t regular wages. They include, but aren’t limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, reported tips, retroactive pay increases, and payments for nondeductible moving expenses.”
So most bonuses, awards, and prizes employees earn for their referrals should show up on their W-2s. Small gifts and those that don’t have an obvious cash value, such as de minimis benefits, can be an exception to this rule.
Referrers who aren’t employees, however, aren’t off the hook. Their bonuses fall under miscellaneous income and may require Form 1099-MISC.
Processing referral bonuses
For employers and staffing agencies
There are two ways to withhold taxes for supplemental income:
- If you prefer to combine supplemental wages with a regular paycheck, you can withhold income tax for the total at your usual rate for that pay period.
- If you prefer to pay out supplemental wages separately, you can withhold a flat rate of 22% for totals less than $1 million. A higher 37% rate applies to any earnings beyond that $1 million mark.
Whichever method you choose, report these bonuses on Form 941 as well as the employee’s W-2.
Each non-employee you’ve paid $600 or more in prizes and awards over the course of the year should receive a Form 1099-MISC from your agency.
For employees and referrers
Employees will find their bonuses recorded on their W-2s.
Referrers who aren’t employees should look for a 1099-MISC form if they’ve earned more than $600 in rewards. This amount counts as additional income on their taxes for the year, and they’ll be responsible for paying any federal and state taxes that apply.
Only bonuses or rewards referrers receive within the year are taxable, not those that agencies promised to them but didn’t yet pay.
No one likes the idea of paying extra taxes, especially when they don’t expect to. So it might be wise for agencies to include applicable tax information when outlining their referral program. But these taxes shouldn’t discourage program participation — they’re only a small price to pay for the benefit of referral bonuses.
If you have additional tax advice regarding referral bonuses to share, be sure to let us know on LinkedIn.
