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. Employers must include bonus amounts when calculating:
- Unemployment taxes
- FICA taxes
Here is the basic run-down of the rules for reporting compensation, including bonuses paid to employees vs. independent contractors. If the recipient is an employee, the employer should always report:
- Wages
- Salaries
- Fees
- Bonuses
- Commissions
- Tips
- Other compensation
These should all be reported as income on the employee’s Form W-2, not on a 1099.
If the recipient of a 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
- That 1099-NEC must include the total amount paid to the worker
This is where it gets a little complicated. The payment should probably be part of the contract between the payer and contractor, and those terms could be a cause for the IRS determining that an independent contractor is an employee. Thus, the employer would be subject to their share of the employment taxes.
The Internal Revenue Service outlines rules for determining whether a recipient is classified as an employee or an independent contractor/self-employed individual. For more details about the treatment of bonuses paid to employees, see the IRS Publication 525.
How are Bonuses Taxed?
Bonuses may also be considered 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 withhold a flat tax of 22% or add a bonus to the employee’s regular pay and withhold it like a single payment.
In early 2025, WorldatWork found that 2024 bonus amounts in specific service industries were down from the previous year. Yet the end-of-year bonuses still averaged $2,503, which was 2% higher than the average in 2023.
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.
Bonuses are not considered deductible expenses for:
- Certain partnerships
- Sole proprietorships
- Limited liability companies (LLCs)
The owners, members, and partners in these businesses are considered to be self-employed. You can find more information on this topic in Publication 525, which is linked above.
Frequently Asked Questions
- Are there exceptions for taxing bonuses? – Yes, there are instances when a bonus that qualifies as an employee achievement award is not subject to the same taxing process, and you might be able to avoid paying federal income taxes.
- Can you lower your tax withholding on a bonus? – Asking an employer to pay a bonus separately from the regular paycheck can help lower the amount of taxes withheld from the bonus.
Filling Out 1099s with AMS
While you will not need to handle a 1099 form when providing bonuses, you might 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, like:
- A website redesign
- A new office floor
- Something else that your company cannot provide
You should ensure that you have access to 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 are interested in trying our W-2/1099 Forms Filer, consider checking out our free 1099-etc Demo software. We have found that the following features are most useful to our users:
- A Common Payee File to allow 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. When you have a 1099-supporting accounting software tool in your back pocket, you can be better prepared for whatever business-related tax filing challenges come your way.