Dealing with Special Payroll Tax Situations: Bonuses, Fringe Benefits, Per Diem

Payroll tax withholding on regular wages is pretty common knowledge and easily handled through most any payroll software or even when payroll is calculated manually. However, there are several other payroll items that may come into play that require some special handling and understanding of the payroll taxes that apply. The details regarding how to handle each of these special situations can be found in IRS Publication 15 which is available online at www.irs.gov.

Here is a brief overview of three of these special payroll tax situations:

Bonuses

You will find the information regarding Federal payroll tax withholding on bonuses under the section titled Supplemental Wages in IRS Publication 15. You will find that there are a couple different ways that tax withholding can be calculated on bonus wages. The IRS has a provided a very simple tax answer to dealing with Federal withholding on bonuses and other similar supplemental wages, that is to withhold a straight 25% of Federal tax withholding. If the bonus is paid in combination with regular wages you have the option of taxing the bonus and wages together at regular payroll table rates or calculating the taxes separately on the two portions, the wages at their regular rate and the bonus at the 25%.

Fringe Benefits

Some company provided fringe benefits like the use of a company vehicle, free or reduced airfare and club memberships are taxable benefits. There are also several fringe benefits that are non-taxable. Again, refer to IRS Publication 15 for a detailed list.

For those taxable benefits, you must estimate the value of the benefits received and then withhold payroll taxes on these benefits. This can be done once at the end of the year or it can be done on a quarterly or monthly basis. As with bonuses, the fringe benefit amounts can either be taxed at the 25% supplemental wage rate or included with regular wages and taxed accordingly.

Per Diem Allowances

If you pay your employees mileage for use of their own vehicle for company travel or provide them with a set allowance for travel days or meals, the IRS has set guidelines on how much can be paid for these items and still remain within the non-taxable bracket of reimbursements. For 2011 the mileage rate is 51 cents a mile. Publication 1542 provides details on other per diem rates. Any reimbursement beyond the allowed amounts becomes taxable income to the employee and must have taxes withheld and be reported as such.

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