Tyler Martin CPA :: NOVEMBER 2005 :: Handling Bonuses and Fringe Benefits



	November 2005 Handling Bonuses and Fringe Benefits Many companies pay employees bonuses at the end of the year. Also, at the end of the year, many companies include, in a paycheck, the income and payroll taxes associated with non-cash fringe benefits, such as the value of personal use of a company-furnished car. In this article, we’ll show you how to handle these “payroll extras.” Paying Bonuses Bonus pay is taxable and therefore bonus paychecks should be created using the payroll features in QuickBooks. The method you use to create a bonus paycheck depends on the payroll service to which you subscribe. Users of QuickBooks 2005 or later who also subscribe to the Enhanced Payroll Service can use a new feature to create a bonus check. You can supply the net amount of the bonus and let QuickBooks calculate gross pay and all the taxes for you. The process is often referred to as “grossing up” a check. If you intend to create a bonus check by grossing up, you must create a separate bonus check because QuickBooks does not permit you to include any payroll items in the Earnings section other than the bonus. If you do not subscribe to the Enhanced Payroll Service, QuickBooks cannot gross up a bonus check for you. So, you can include bonus pay on a regular paycheck or write a separate check. In this article, we’ll include bonus pay on a regular paycheck. Reporting Non-Cash Fringe Benefits When you permit an employee to use a company-owned car, you aren’t giving the employee cash, but you must include the value of non-cash fringe benefits in the employee’s gross income and withhold payroll taxes accordingly. You should include fringe benefits on a regular paycheck so that you’ll have regular cash earnings from which to withhold taxes. The amount of taxes you need to withhold is calculated from an IRS table that uses the original cost, the fair market value, or lease value of the car and the percentage of personal use the employee makes of the employer-owned vehicle. If the employee doesn’t report percentage of personal vs. business use to you, you must assume that 100% of the car was used personally and calculate taxes due based on 100% of the value of the car. If the employee reports the percentage of personal vs. business use, the fringe benefit amount is calculated by multiplying the value by percentage of personal use. Ask your accountant to make the calculation for you. Setting Up Payroll Items To report a non-cash fringe benefit such as the personal use of a company car, you need a payroll item. And, regardless of whether you subscribe to the Enhanced Payroll Service (and therefore intend to gross up checks), you also need a Bonus payroll item. Open the Lists menu and click Payroll Item list. Then, click the Payroll Item button at the bottom of the window and click New. The Add New Payroll Item wizard begins. On the first screen of the wizard, click Custom Setup and click Next. You see the window shown in Figure 1. Figure 1. Select the type of payroll item you want to create. To set up the non-cash fringe benefit for personal use of a company car, click Company Contribution and click Next. Supply a name for the payroll item—we called ours “Company Car”—and click Next. On the Agency for company-paid liability screen (see Figure 2), select your payroll expense account for both the liability and the expense account; then click Next. QuickBooks will display a warning message about using the same account; click Yes. Figure 2. Select the same account for both the payroll liability and the payroll expense. A non-cash fringe benefit should have no affect on your company’s books, so selecting the same account here makes QuickBooks debit and credit the same account, negating the effect of the transaction on the company’s books. On the Tax Tracking Type screen, select Fringe Benefits from the list and click Next through the rest of the wizard until you reach the last screen, where you click Finish. When you select Fringe Benefits, QuickBooks suggests that all taxes apply to the payroll item and QuickBooks automatically displays the amount for the payroll item in Box 14 on the W2. If your company car should be included in gross wages to calculate some but not all taxes, change the settings for taxes before you click Finish. As of this writing, the company car non-cash benefit is subject to FIT, Social Security, and Medicare. Check your Circular E or with your accountant to identify the taxes affected by the benefits you offer. Typically, bonuses are treated like regular wages. To create the Bonus payroll item, press Ctrl+N to start the wizard again. Use the Custom Setup option again and on the Payroll item type screen (refer back to Figure 1), click Wage and then click Next. On the Wages screen (see Figure 3), click Bonus and then click Next. Supply a name for the payroll item—we called ours “Annual Bonus”—and click Next. On the last screen of the wizard, QuickBooks suggests you use your payroll expenses account to track this payroll expense; click Finish. Figure 3. Select Bonus as the type of wage payroll item you want to create. Bonus Checks and the Enhanced Payroll Service To create a grossed-up bonus paycheck when you subscribe to the Enhanced Payroll Service, remember to create a separate check for the bonus and follow these steps: 1. Open the Employees menu and click Pay Employees. QuickBooks displays the Select Employees to Pay window. 2. Click the Enter Hours and preview check before creating option button. 3. Select the employee(s) for whom you want to write grossed-up bonus checks. 4. Click Enter Hours and Preview Check Before Creating. 5. Click Create. QuickBooks displays the Preview Paycheck window (see Figure 4). 6. Remove all payroll items from the Earnings section and from the Other Payroll Items section. 7. Add the Bonus payroll item to the Earnings section. Figure 4. Set up the paycheck so that only the Bonus payroll item appears in the Earnings section and no payroll items appear in the Other Payroll Items section. 8. In the lower right corner of the window, check the Enter net/Calculate gross check box. 9. Type the net amount of the bonus check in the Check Amount box. QuickBooks calculates taxes and gross pay (see Figure 5). Figure 5. When you enter the amount of the bonus, QuickBooks calculates gross wages and taxes. Producing Yearend Paychecks without the Enhanced Payroll Service If you are not using the Enhanced Payroll Service, you can include bonus pay and a non-cash fringe benefit on a regular paycheck. Open the Employees menu and click Pay Employees to open the Select Employees To Pay window. Set up the window as you usually would, but at the top of the window, click the Enter Hours and preview check before creating option button. Select the employees to pay and click the Create button. When QuickBooks presents the Preview Paycheck window, click in the Item Name column of the Earnings section. Open the list box and choose the Bonus payroll item and supply the bonus amount in the Rate column (see Figure 6). QuickBooks adds the bonus to the Employee Summary on the right and recalculates the amount of the paycheck. Figure 6. Add the Bonus to the paycheck. To include the Company Car fringe benefit to the employee’s paycheck, click in the Item Name column of the Other Payroll Items section. Open the list box and choose the Company Car payroll item and supply the amount in the Rate column (see Figure 6). QuickBooks uses the amount you enter to adjust the taxes on the paycheck and recalculate the amount of the paycheck. Summary In this article, we’ve shown you how to set up payroll items for bonuses and fringe benefits and how to include them on paychecks, whether you are using the Enhanced Payroll Service or the Standard Payroll Service. As the end of the year approaches, you will be ready to prepare year-end paychecks.