Holiday Bonuses: Do This Tax Calculation Wrong and You'll Owe Penalties

Holiday Bonuses: Do This Tax Calculation Wrong and You'll Owe Penalties

A $2,000 holiday bonus to each team member isn't $2,000. Add employment taxes, FICA, and state withholding. For five employees, that $10K bonus just cost $11.2K.

Here's the trap. Most practices pay bonuses in December but don't withhold properly. The IRS treats bonuses as supplemental wages. You can either withhold 22% federally plus state (default rate) or use the aggregate method. Pick the wrong one, and you're short on your quarterly estimates.

Bonus timing matters. Pay before December 31 for the current tax year deduction. Pay January 2 and it's next year's deduction. Your accountant needs to know this plan by November 15.

Smarter move: Consider bonuses as a percentage of practice profit, set the pool aside in October, and let your accountant model the tax hit. Profit-sharing reduces personal income tax. Straight bonuses don't.

Action: Call your CPA this week. Ask about bonus withholding treatment and whether profit-sharing makes sense for your practice structure. Don't surprise them in January.

Sources: IRS Publication 15-B, dental practice accounting standards