Year-End Bonus for Your Crew: How to Pay It So They Get the Number You Promised

Tell your lead tech “here’s $1,000 for a great year” and run it through payroll. The check that reaches them is about $703.50 before state tax. In California it is closer to $588. If they should see the number you promised, you have to gross the year-end bonus up. A $1,000 net, before state tax, takes about $1,421 in gross pay. Below is where the money goes and which withholding method you can use. Then comes why the gift card is wages and the turkey is not, and the gross-up worked through.

Why a $1,000 year-end bonus turns into about $700

To the IRS, a bonus is a supplemental wage: pay that isn’t regular wages, alongside commissions, awards and back pay. It goes through payroll like any other wages, with federal income tax withheld and both halves of social security and Medicare. Here is a $1,000 bonus paid on its own check, for an employee whose income tax you already withhold from regular pay this year:

The 22% is withholding, not the final tax. Your employee settles the real figure on their own return, and some will get part of it back. That does not change what lands in their account in December, which is the number they will compare with what you said.

Flat 22% or aggregate: which method you can use

IRS Publication 15 gives you two ways to withhold federal income tax on a bonus. The optional flat rate is 22%, rising to a mandatory 37% on supplemental wages above $1 million in a year. The rate stays at 22% because P.L. 119-21, the federal tax law of July 2025 known as the One Big Beautiful Bill Act, made the 2017 individual tax rates permanent. The aggregate method adds the bonus to a regular paycheck, withholds as if the total were one normal payment, then subtracts what the regular pay already covered.

You can choose the flat 22% only if two conditions hold. You must have withheld income tax from that employee’s regular wages this year or last year. And the bonus must be paid separately, or shown as a separate amount on a combined check. Folded into regular pay without its own line, it is withheld as one regular payment. With no income tax withheld from regular wages at all, only the aggregate method is available.

The two methods can give very different results. In the IRS’s own example, a $1,000 bonus to an employee on a $2,000 monthly salary has $114 withheld under the aggregate method and $220 under the flat rate. Neither changes the employee’s actual tax for the year, only the timing.

State withholding comes on top

States set their own rules, and some have no wage income tax at all. Two examples, both for 2026. California’s employer guide DE 44 allows a flat 10.23% on bonuses only when the bonus is not paid with regular wages. On the same paycheck, California requires the regular withholding tables. California’s State Disability Insurance contribution of 1.3% also comes out of the bonus. New York’s withholding tables set a supplemental rate of 11.70%, with the same conditions as the federal rule. Elsewhere, your payroll provider applies your state’s rule.

Social security, Medicare and FUTA on a December bonus

Whatever withholding method you use, the bonus carries payroll taxes. For 2026, social security is 6.2% from the employee and 6.2% from you, on wages up to $184,500. Medicare is 1.45% each, with no cap. An extra 0.9% Additional Medicare Tax comes out of the employee’s pay once their wages pass $200,000 in the year; there is no employer share.

Federal unemployment tax is 6.0% on the first $7,000 of each employee’s wages, usually 0.6% after the state credit. A crew member who has worked for you all year passed $7,000 long before December. For them, FUTA normally adds nothing to the bonus. A seasonal hire who started in the fall may not have.

Gift cards are wages, the turkey usually is not

Publication 15-B is blunt about cash equivalents: gift cards, gift certificates and the use of a charge card, “no matter how little,” are never excluded as a small fringe benefit. A $100 gift card is $100 of wages. It goes through payroll, and because the card has no cash to withhold from, the taxes come out of the next regular check or you gross the card up. Calling it a safety award does not change that.

A holiday gift of property with a low market value is different. The IRS lists “holiday or birthday gifts, other than cash, with a low fair market value” as a de minimis fringe benefit, one too small to be worth accounting for. A turkey or a ham fits that description, though the IRS does not name them and sets no dollar limit. The same goes for occasional parties for employees and their guests. Our article on the take-home work truck covers a fringe benefit that does have to be valued.

The holiday party and gifts to customers

Food and drink for a holiday party are normally outside the 50% limit on business meals, under the exception for recreational and social activities. It applies only when the party is mainly for employees other than highly compensated ones, so a dinner for the owners alone does not qualify. The 2025 law changed the deduction for on-premises staff meals from 2026, not for holiday parties.

Gifts to customers follow a separate rule. You can deduct at most $25 per person per year for business gifts, and a basket sent to a client company for three people counts as three gifts, not one. That cap does not apply to your crew, whose gift cards are wages. The IRS travel, gift and car expenses guide sets out both rules, and our list of contractor tax deductions covers the rest.

Paid in December or January

A year-end bonus belongs to the year it is paid, not the year it was earned. The 2026 Form W-2 instructions give the example themselves: wages paid on January 1, 2027, go on the 2027 W-2. A bonus run with the last December payroll is on the 2026 W-2, alongside any changes covered in our 2027 overview. If your payroll provider’s last run of the year closes early for the holidays, check its cut-off date before you promise a December payment.

Your subcontractors are not on payroll, so a thank-you payment to a sub is not a bonus in this sense. It adds to what you paid them for the year, and from 2026 you file a 1099-NEC once that total reaches $2,000. Our guide to the new 1099-NEC threshold explains the change, and our article on hiring your first employee covers payroll setup.

Grossing up: the number to put on the check

To promise a net amount, divide it by what is left after the withholding rates. The illustration below assumes the flat 22% method, an employee past $7,000 in wages for the year and well under the social security cap, and no state income tax. Payroll software rounds each line, so expect a cent of difference. The formula only works with the flat method; under the aggregate method the result depends on the employee’s W-4.

• Combined rate: 22% + 6.2% + 1.45% = 29.65%.
• Gross bonus: $1,000 ÷ (1 − 0.2965) = $1,421.46.
• Withheld: $312.72 income tax, $88.13 social security and $20.61 Medicare, $421.46 in all.
• Net to the employee: $1,000.00.
• Your cost, with your own $88.13 and $20.61: $1,530.20.

For a California employee paid on a separate check, add 10.23% state withholding and 1.3% SDI. The same $1,000 net then takes $1,700.10 gross and costs you $1,830.16. So the honest promise to your lead tech is either “$1,000 before taxes,” which reaches them as about $703.50 before state tax, or “$1,000 in your pocket,” which takes a $1,421.46 bonus.