Compute Overtime Pay Correctly When a Bonus is Issued

computing and reporting overtime pay

Bonuses can be an effective way for employers to reward hourly employees for an outstanding year. Some employers also offer a bonus as an incentive to meet certain productivity or sales goals.  Make sure you understand the definitions of each type of employee bonus and are computing and reporting overtime pay correctly when a bonus is issued.

Non-discretionary and Discretionary Bonuses

A non-discretionary bonus is typically announced to employees in advance and paid out when specific criteria is met. Employees expect they will get a bonus if they meet the criteria.  These often appear in the form of defined incentive or recognition programs that reward employees for obtaining productivity or other goals, and must be included when calculating a “regular rate of pay” for overtime premium pay calculations.  Care should be taken to ensure this applies only to the overtime premium (one-half the regular rate of pay).  The Dept. of Labor’s website provides an overtime calculator www.dol.gov/WHD  to assist in computing the premium.

An example from the FLSA overtime calculator is provided here based on 50 total hours worked with a regular rate of pay at $10 per hour.

A discretionary bonus payment is not made according to any prior contract, agreement or promise causing the employee to expect such bonus. An example would be an employer that decides to surprise employees with a bonus at the end of the year.  These payments are not included in the regular rate of pay.

Bonuses are generally considered supplemental income and are subject to federal taxes and certain state taxes. Some bonuses including cash, gift certificates, gift cards or other “like cash” items are considered taxable wages by the IRS. Typically, tangible rewards such as food items or other gifts of nominal value are not considered income.

Providing bonuses or incentives to employees can be an effective way to achieve company goals, improve performance and reward employees who have gone above and beyond. Just make sure you understand the difference between a nondiscretionary and a discretionary bonus – and the implications of each.

 

This is not intended to be tax advice. Each situation is different, so consult your payroll representative or our office.