My company is giving everyone a car as a bonus, whats my tax liability?

10 replies
159 views

My company is giving every employee $75,000 towards a new car if we hit our 5 year goals. What is the tax liability on a tangible bonus like that? Will I get hit with a ~$20k tax bill when I go to file taxes in April?

Not A Product Question

Mike9241Answer

Level 15

if it issues a 1099-NEC, not only will you pay regular income taxes on it but also effectively about an additional $10,600 in self-employment tax. i and I believe the IRS would also find using 1099's to report employee compensation as inappropriate. the company could face a huge penalty. even the employees who get it could face tax issues such as taking a 199A deduction. you got paid as an employee of the company for achieving goals the company set. including the payment on your w-2 seems to be the proper thing to do

Mike9241

Carl

Level 11

Most likely, the $75K will be included in box 1 of your W-2. But you *NEED* to ask this question to the company, as they might issue you a physically separate 1099-NEC for the amount. If the amount is a commission payment, then in addition to regular taxes, you'd also pay the additional 15.3% self-employment tax on the amount.

Opus 17

Level 15

@Carl11_2 wrote:

Most likely, the $75K will be included in box 1 of your W-2. But you *NEED* to ask this question to the company, as they might issue you a physically separate 1099-NEC for the amount. If the amount is a commission payment, then in addition to regular taxes, you'd also pay the additional 15.3% self-employment tax on the amount.

I disagree about the amount of tax owed. If the company does not withhold tax, and issues a 1099-NEC, the taxpayer will only need to pay 7.65% for social security and medicare, not 15%. They will file form 8919 with code H with their tax return (for "I received a Form W-2 and a Form 1099-MISC and/or 1099-NEC from this firm for 2021. The amount on Form 1099-MISC and/or 1099-NEC should have been included as wages on Form W-2.")

Note, I am assuming the taxpayer is correct when they say "my employer is paying a bonus." If the employer pays a bonus to a W-2 employee, it must be on their W-2 and is subject to withholding, even if is a bonus or commission. However, if this is a commission paid by a manufacturer as a reward for meeting a sales quota, this would be considered a "SPIFF" and the rules are different. In this case, it would not be on the W-2 from the employer, and the 1099-NEC would come from the manufacturer. The taxpayer should pay estimated income tax of 25% for income tax and 7.65% for social security and medicare (SPIFFs are not subject to self-employment tax because they are not self-employment, even if the payer uses a 1099-NEC instead of a 1099-MISC.)

If this is a SPIFF, you may want to ask for more details.

Carl

Level 11

@Opus 17 neither of us has enough information to work with. I am not assuming the OP works as a W-2 employee for the company as the only possibility. What if "the company" is a real estate agency and the OP is a realtor? Kinda far-fetched I think for $75K. While not impossible, I'm sure that's not the only possibility out there. It's just the only one I can think of right now. Just covering all basis.

Another (bad) example would be a fuller brush salesman. But I don't think any of those folks are around anymore. 🙂

Mike9241

Answer

Level 15

Mike9241

Opus 17

Level 15

Everything of value provided to an employee as compensation for services performed must be included on your W-2 wages and is subject to regular income tax withholding just like wages. If the company pays you a $75,000 cash bonus added to one of your paychecks, they are supposed to automatically withhold the required federal, state, social security and medicare taxes. Your net take-home from the bonus will be closer to $50,000, depending on the state you live in. The bonus is then included in your W-2 at the end of the year. You are unlikely to owe additional tax with your tax return because the withholding should cover most or all of the required taxes.

[Edited to add]

If they actually just provide a car, they are required to include the value on your W-2 and withhold the same taxes they would be required to withhold if they gave you money. This extra withholding would come of your other cash wages so you would likely see a significant reduction in your take-home pay, either for one pay period or spread out over several pay periods. But this would still take care of the taxes and you would not have to send extra money to the IRS.

As mentioned by others, if the company does not withhold tax, they are breaking the law, and trying to make you responsible for both halves of social security and medicare taxes. There is a way to fix this at tax time, but you should make about a 30% estimated payment to the IRS and a 5-13% estimated payment to your state, depending on where you live.