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Taking the Bite Out of Bonus Checks

You want to reward your employees for their hard work, but you don't need more hard work yourself. You can let QuickBooks Payroll handle the details of figuring taxes on bonuses, writing bonus checks, and tracking bonus as well as regular pay. Here are answers to the top questions about bonus checks.

  1. How should I set up a payroll item for bonuses?
  2. Can I include regular pay and bonus pay in the same check?
  3. How do I create a separate check for a bonus?
  4. What check date and pay period should I assign to the bonus check?
  5. How do I figure out the taxes on a bonus, if I want the bonus to be a round amount?
  6. I use the QuickBooks Payroll Direct Deposit service. Do I need to do anything differently when I prepare my bonus checks?
1. How Should I Set Up a Payroll Item for Bonuses?

You should set up a wage payroll item specifically for bonuses, so you can track the bonuses you pay your employees. To add the payroll item, use the custom setup method:
  1. From the Employees menu, choose Payroll Item List.
  2. From the Payroll Item menu button, choose New.
  3. Select Custom Setup, and click Next.
  4. Click Wage, and click Next.
  5. Click Bonus, and click Next.
  6. Follow the onscreen instructions to complete the setup process.
  7. To go back to a previous window, click Prev.
2. Can I Include Regular Pay and Bonus Pay in the Same Check?

Yes, you can include bonus pay in a regular paycheck by adding the bonus payroll item to the Earnings section of the paycheck. Before you begin, make sure a bonus payroll item is correctly set up in the Payroll Item list.
  1. From the Employees menu, choose Pay Employees.
  2. Mark the employee you want to pay.
  3. Verify the check date and the end of the pay period date.
  4. Click the button next to Enter hours and preview check before creating.
  5. Click the Create button to display the Preview Paycheck window.
  6. In the Earnings section, click in the Item Name column to display the list of payroll items.
  7. Select your bonus payroll item.
  8. Enter the gross amount of the bonus in the Rate field. QuickBooks calculates the taxes and other additions and deductions and displays the net check amount in the Check Amount field at the bottom of the Employee Summary section.
  9. To record the check for the amount displayed, click Create.
3. How Do I Create a Separate Check for a Bonus?

To create a separate check for a bonus, include only the bonus payroll item in the Earnings section of a paycheck. Before you begin, make sure you have set up a bonus payroll item in the Payroll Item list.

Also before you start, consider whether you need to apply your employee's regular deductions or additions to the bonus check. For example, if the employee usually has wage garnishments and health insurance contributions on their regular pay, determine whether you need to apply those to their bonus check (normally you wouldn't). If you are not certain, consult your accountant or tax advisor.
  1. From the Employees menu, choose Pay Employees.
  2. Mark the employee for whom you want to create a bonus check.
  3. Verify the check date and the end of the pay period date.
  4. Click the button next to Enter hours and preview check before creating.
  5. Click the Create button to display the Preview Paycheck window.
  6. Delete the salary or wage payroll item(s) in the Earnings section. (Select the item in the Earnings list and press Ctrl+Del on your keyboard.)
  7. If there are any additions or deductions (for example, health insurance) on the regular paycheck that you do not want to be calculated on this bonus check, delete those items as well. (Select the item in the Additions/Deductions section and press Ctrl+Del.)
  8. Add the bonus payroll item to the Earnings section.
  9. If you subscribe to QuickBooks Standard Payroll, enter the gross amount of the bonus in the Rate field. QuickBooks will calculate the appropriate taxes, additions, and deductions, and display the net amount of the check in the Check Amount field at the bottom of the Employee Summary section. (See tip 5 How Do I Figure Out the Taxes on a Bonus? to learn more about how to produce a round net check amount.)

    If you subscribe to QuickBooks Enhanced Payroll or QuickBooks Enhanced Payroll for Accountants, you can simply enter the desired net amount of the check in the Check Amount field (at the bottom of the Employee Summary section). Then check the Enter net/Calculate gross box, and QuickBooks calculates the gross amount for you.
  10. To record the bonus check for the amount displayed, click Create.
4. What Check Date and Pay Period Should I Assign to the Bonus Check?

This question usually comes up when you are issuing a bonus at the end of the year for work done during the calendar year. You should keep in mind that the check date is the date that the check will affect your bank account. The IRS will also count the bonus earnings as applying to the year in which the check date falls. So, for example, if you want to reward employees for work done in 2005, but you date your bonus check January 7, 2006, the IRS will count that money as 2006 earnings, not 2005 earnings, and you and your employee will pay taxes on it as part of your 2006 taxes.

The pay period, on the other hand, refers to the period during which the money was earned. For bonuses that are unrelated to a specific period of time (for example, if you are rewarding the employee for the whole year's worth of work, rather than for a special effort they made during a particular week), the IRS (in Section 8 of IRS Publication 15 (Circular E) ) offers the following guidelines for choosing the bonus check's pay period.

Count back the number of days from the payment period (for example, December 31, when you are rewarding an employee for a whole year's work) to the latest of:
  • The last wage payment made during the same calendar year (that is, the end of the last pay period in which you wrote a paycheck to this employee),
  • The date employment began, if during the same calendar year, or
  • January 1 of the same year.
5. How Do I Figure Out the Taxes on a Bonus, If I Want the Bonus Check To Be a Round Amount?

If you subscribe to QuickBooks Standard Payroll and you want to create a bonus check that is a round amount, such as $1,000, you must adjust the bonus amount until the net amount is what you want.

If you subscribe to QuickBooks Enhanced Payroll in QuickBooks 2005, you can use the Enter net/Calculate gross feature—simply enter the round amount you want the net check to be, and QuickBooks will figure out what the gross amount should be.

Adjust the Bonus Amount (QuickBooks Standard Payroll)
First, enter an amount for the bonus. Then look at the amount of the net check and adjust the bonus amount up or down until the net amount becomes the round amount you want.
  1. From the Employees menu, choose Pay Employees.
  2. Mark the employee for whom you want to create a bonus check.
  3. Verify the check date and the end of the pay period date.
  4. Click the button next to Enter hours and preview check before creating.
  5. Click the Create button to display the Preview Paycheck window.
  6. Optional: Delete the salary or wage payroll items in the Preview Paycheck window. (Select an item in the Earnings list and press Ctrl+Del.)
  7. If there are any additions or deductions (for example, health insurance) on the normal paycheck that you do not want to be calculated on this bonus check, delete those items as well. (Select the item in the Additions/Deductions section and press Ctrl+Del.) If you are not sure whether to apply the employee's usual additions or deductions to a bonus check, consult your accountant or tax advisor.
  8. Add the bonus payroll item to the Earnings section.
  9. Enter an amount for the bonus in the Rate field.
  10. Look at the net amount in the Check Amount field at the bottom of the Employee Summary section. If the net amount is too high, reduce the amount for the bonus item in the Earnings section. (Quick Tip: It is easier to make large adjustments at first to get the range the amount needs to be within. Then narrow down to smaller adjustments.)
  11. When the net amount is what you want, click Create to write the bonus check for the amount displayed.
Using the Enter net/Calculate gross Feature (QuickBooks Enhanced Payroll Only)
If you subscribe to QuickBooks Enhanced Payroll or QuickBooks Enhanced Payroll for Accountants, QuickBooks will do all the figuring for you. You just enter the desired net dollar amount of the bonus check in the Check Amount field, and QuickBooks will calculate and add the proper tax withholding and deductions to this amount. If you use this feature, called Enter net/Calculate gross, the check must contain only the bonus.
  1. From the Employees menu, choose Pay Employees.
  2. Mark the employee for whom you want to create a bonus check.
  3. Verify the check date and the end of the pay period date.
  4. Click the button next to Enter hours and preview check before creating.
  5. Click the Create button to display the Preview Paycheck window.
  6. From the Preview Paycheck window, click Enter net/Calculate gross and enter the desired net check amount.
  7. Click Create to save the paycheck.
Note: The Enter net/Calculate gross feature is available only to QuickBooks Enhanced Payroll and QuickBooks Enhanced Payroll for Accountants subscribers in QuickBooks 2005 and Enterprise 5.0.

6. I Use the QuickBooks Payroll Direct Deposit Service. Do I Need to Do Anything Differently When I Prepare My Bonus Checks?

If you issue many bonus checks at the same time, you might need to temporarily increase your Direct Deposit limits before you send in your payroll. See www.payroll.com/limits for more information. If you are unsure whether your bonus payroll will exceed your current limits, a customer service representative can help you assess whether you need to request a limit increase. Call 800-624-2106 to reach a customer service representative.

Like your regular payroll, you need to send your Direct Deposit bonus paychecks to QuickBooks Payroll by 5 p.m. Pacific Time at least two business banking days before the paycheck date. (Federal Reserve Bank Holidays may require that you send your Direct Deposit information sooner. For example, if the check date is Tuesday, and Monday is a holiday, send your paychecks by Thursday at 5 p.m., and the debit will occur Friday.) This allows time for the service to process your payroll information and transfer funds from your account into your employees' accounts. The debit to your bank account occurs the banking day before the paycheck date.

If you want to issue the bonus check as a paper check instead of as a direct deposit, make sure to uncheck the box next to Use Direct Deposit in the Preview Paycheck window.











The information contained in the QuickBooks Payroll Bulletin is meant to provide general information about the payroll process and is not intended to provide tax or legal advice. Always consult your tax professional when preparing tax documents.

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