How to Handle Holiday Payroll and Bonuses Without Tax Surprises

As the holidays approach, many small business owners want to reward their teams with well-earned bonuses or extra pay. But without careful bookkeeping and payroll planning, those year-end payouts can create tax headaches later.

Do bonuses count as taxable income?
Yes. Employee bonuses are subject to federal and Virginia payroll taxes just like regular wages. They must be recorded in your books and included in year-end W-2 reporting.

What bookkeeping steps should I take before issuing bonuses?
Reconcile payroll accounts and confirm all prior wages, withholdings, and employer taxes are accurate. This ensures bonuses run through payroll correctly and prevents over- or underpayment of taxes.

Example:
A Leesburg HVAC company processed December bonuses before updating payroll tax settings. When reviewed, they owed $1,400 in extra taxes. Adjusting their system ahead of time kept their filings clean and compliant.

From all of us at Veteran Bookkeeping, we’re thankful for the trust our clients place in us year-round. Wishing you and your families a warm, happy, and restful Thanksgiving.