A lump-sum payment made to a new employee upon hire, taxable as supplemental wages at the flat 22% federal rate. Sign-on bonuses often include clawback clauses requiring repayment if the employee leaves before a set date.
Why Sign-On Bonus matters for employers
Sign-on bonuses are taxable as supplemental wages in the pay period they are issued. Employers withhold at the flat 22% federal rate (or aggregate with regular wages at the employee's marginal rate). Employers also owe FICA on sign-on bonuses. Clawback clauses in offer letters typically require repayment of the gross bonus amount if the employee resigns before a set period, usually 12-24 months.
When a clawback is triggered, the repaid amount reduces the employee's taxable income in the year of repayment, not the year the bonus was paid. Employers cannot simply reverse withholding already remitted to the IRS. This creates a taxable event management process that must be handled correctly to avoid employee disputes and tax complications.
How BEG handles Sign-On Bonus for clients
BEG Managed Payroll handles Sign-On Bonus as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Sign-On Bonus on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Sign-On Bonus themselves?
No. A managed payroll provider handles Sign-On Bonus as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Sign-On Bonus is handled incorrectly?
Errors related to Sign-On Bonus can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Sign-On Bonus for managed payroll clients?
BEG tracks, calculates, and remits everything related to Sign-On Bonus as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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