Paying income tax on a variable salary

Variable salary or variable pay is what people make in addition to their regular wages. The idea behind variable pay is that employees need to be recognized when they go above and beyond what is called for which contributes to the success of the company. Employees should be recognized and rewarded for what they have done to improve company productivity, profitability, team work, safety, or anything else that they have contributed to help the company. By recognizing and rewarding your employees you will help to increase employee morale which will also help your company, in addition to what the employee or employees have already done. Variable pay can be rewarded in a variety of ways including but not limited to: profit sharing, bonuses, holiday bonus, deferred compensation, cash, a Thanksgiving turkey or a company-paid trip.

Now that we understand what a variable salary is you are probably wondering about paying income taxes on the variable salary. As most of us are aware the government taxes pretty much everything that we earn and since variable salaries are rewards for worked performed they are considered compensation for work performed and are taxed. If you are giving your employees any type of bonus you are paying them a variable salary and you must withhold taxes on that income. Some of you might think that bonuses should be considered a benefit but the Internal Revenue Service does not view it that way the only items they consider benefits are fringe benefits which can include entertainment and expenses reimbursement, medical reimbursements and cafeteria plans, these types of benefits are not taxable to the employee or the employer.

Paying income taxes on a variable salary can be done in a variety of ways, but how it is done depends on how the bonus is given to your employees. As employers you can withhold taxes at the time the bonus is given based on a flat tax rate or you can add their bonus in to their pay check and figure out the taxes on the larger amount. Or at the end of the year you can add up all of the bonuses that the employee has received and add it in to their gross income on their W-2. Let's look at a few examples of how taxes can be paid on a variable salary.

Example one:
Your company rewards its employees with a holiday bonus every year at Christmas, so you only have to worry about the extra taxing once a year. Because it is only done once a year you decide to withhold tax at the flat rate of twenty-eight percent. Because you have done that most likely your employees will have paid too much tax during the year, but that is better than having paid to little.

Example two:
Your company gives your employees a holiday bonus at Christmas time and bonuses once a month based on their amount of sales. Because you are given your employees bonuses on a regular basis your company has decided to add it in to their paychecks and determine the amount of taxes owed based on the higher amount. While this is not as easy to do as applying a fixed rate to the bonuses it is better in the long run for the employees because the employees are not having too much tax withheld, and it gives employees more of their own money. When you withhold at a flat rate it seems like over half of the bonus goes to income taxes.

Example three:
Your company gives your employees gift certificates to grocery stores at Thanksgiving, you give a cash bonus at Christmas time, and little other cash bonuses during the year. Because you are giving your employees cash it is harder to withhold taxes prior to given them the bonus. So what you need to do is to keep track of what you have given every employee and add it into their gross income at the end of the year so that they are responsible for paying taxes on their cash bonuses at the end of the year.