Rev. Rul. 58-113

The Internal Revenue Service has been requested to pass upon formulas submitted by employers in computing the gross amount of a bonus where the employer wishes to pay an employee a stated amount of take-home pay as a bonus and, to pay on the employee's behalf, the income tax required to be withheld under section 3402 of the Internal Revenue Code of 1954 and the employee tax under section 3102 of the Federal Insurance Contributions Act (chapters 24 and 21, respectively, subtitle C, Internal Revenue Code of 1954).

For purposes of income tax withholding, the term `wages' includes the amount paid by an employer on behalf of an employee (without deduction from the remuneration of, or other reimbursement from, the employee) on account of any tax imposed upon the employee. Section 31.3401(a)-1(b)(6) of the Employment Tax Regulations. For purposes of the tax under the Federal Insurance Contributions Act, the term `wages' does not include employee tax under the Act which is paid by the employer but does include the income tax to be withheld. Section 31.3121(a)(6)-1 of the regulations. Thus, the income tax required to be withheld under section 3402 of the Code and the employee tax imposed by the Federal Insurance Contributions Act must be included as `wages' in the income tax withholding computations. In computing the employee tax under the Federal Insurance Contributions Act, only the income tax to be withheld constitutes `wages' in addition to the amount of the net bonus.

The Internal Revenue Service does not prescribe formulas to be used in computing tax liability but will interpose no objection to the use of formulas so long as the statutory requirements are accomplished. If such a method of calculation is used and the employer wishes to absorb on behalf of his employees the income tax withholding with respect to bonus payments at the current (1957) minimum rate of 18 percent and/or the employee tax under the Federal Insurance Contributions Act at the current rate of 2 1/4 percent, the following computations suggested by the employer will be acceptable:

(1) Based upon the 2.25 percent rate under the Federal Insurance Contributions Act, the net bonus should be increased by 22.56 percent for income tax withholding and by 2.76 percent for the employee tax under the Federal Insurance Contributions Act, a total of 25.32 percent. The figure for income tax withholding is equal to 18 percent of the sum of the net bonus, the withholding tax to be paid by the employer on behalf of the employee, and the employee tax under the Federal Insurance Contributions Act to be paid by the employer. The figure for the employee tax under the Federal Insurance Contributions Act is equal to 2.25 percent of the sum of the net bonus and the withholding tax to be paid by the employer on behalf of the employee.

(2) If the employee is not subject to the taxes imposed by the Federal Insurance Contributions Act with respect to the bonus payment, but is subject to income tax withholding, the net bonus should be increased by 21.95 percent (a figure equal to 18 percent of the sum of the net bonus and the income tax withholding to be paid by the employer on behalf of the employee).

For purposes of illustration, assume that the employer wishes to give an employee a bonus of $100.00. If the employee is not subject to the Federal Insurance Contributions Act taxes with respect to the bonus, the gross earnings figure would be $121.95 and the employer would pay $21.95 in income tax withholding on behalf of the employee. If the employee is subject both to income tax withholding and to the Federal Insurance Contributions Act tax with respect to the bonus, the gross earnings figure would be $125.32, made up of $100.00 of net bonus, $22.56 of income tax withholding, and $2.76 of employee tax under the Federal Insurance Contributions Act. In addition to the latter two amounts ($22.56 and $2.76), the employer would also pay $2.76 of employer tax under the Federal Insurance Contributions Act.