I want to gross-up bonus using the proper tax rates. I see the flat rate of 25%, but is that only federal income tax? Do I still need to include FICA and state rates?

[kerrygiansante]

I am trying to gross up a bonus using the proper tax rates. I used the TurboTax bonus calculator using the percentage method. We want the employee to net a $500 bonus. The calculator taxed the bonus at a flat rate of 25%, making the gross amount $625. However, I am receiving mixed information because other sites are stating that in addition to this flat 25% federal tax, I must include state bonus tax rates (NYS 9.62%) and FICA taxes. Is this correct or is it as simple as a 25% flat rate for federal income tax?

[TomYoung · Accepted solution]

A "paycheck", whether "regular" or "bonus" must have all taxes associated with "compensation" withheld.  So you can't issue a bonus without withholding federal, state, FICA and any local taxes.

In any case a bonus of $625 with 25 percent of the $625 withheld won't net a $500 bonus.  $625 - ($625 x .25) = $625 - $156.25 = $468.75

The general equation here is: Gross bonus - federal withholding - state withholding - FICA - Local Taxes = NET

   Or

Gross bonus - (Gross bonus x federal rate used) - (Gross bonus x state rate used) - (Gross bonus x 7.65%) - (Gross bonus x local tax rates) = NET

ASSUMING that there are no local taxes and ASSUMING you elect to use the 25% federal, 9.62% state and 7.65% FICA rates this equation becomes

Gross bonus - (Gross bonus x 25%) - (Gross bonus x 9.62%) - (Gross bonus x 7.65%) = NET , simplifying to

Gross bonus - (Gross bonus x 42.27%) = NET or

(Gross bonus x 57.73%) = NET

Setting the NET to $500 and solving for "Gross bonus" results in

Gross bonus = $500/57.73% = $866.10.

If there ARE local taxes - and in New York I'd be surprised if there weren't any - you need to include those in the above calculation.

Tom Young