Employers should deduct taxes on bonuses, too

Question: I just started working in a sales position that pays me a salary plus commissions, or "bonuses," as my employer calls the extra pay. The company does not take out taxes from the bonuses and instead said we need to claim it on our taxes by filing a 1099 form. I would rather have taxes deducted so I don't have to deal with them later. Is this a normal process?

Answer: You sound like an employee, but your company is treating you like an independent contractor regarding your bonus. Independent contractors file 1099 tax forms because they are responsible for paying their own income-related taxes, such as Social Security and Medicare. On the other hand, employers are responsible for deducting those taxes from employees' wages and including them on the workers' W-2 tax forms. And companies must also deduct the taxes from supplemental wages, a category that includes bonuses.

The supplemental-wage category is broad. "They include, but are not limited to bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases and payments for nondeductible moving expenses," the IRS says.

The tax rate on the supplemental wage payments depends on such things as the size of the bonus, the employee's withholding allowances and whether the bonus payments are paid as a part of an employee's wages or separately, according to the IRS.

So you're going to have to file the taxes your company didn't take out. Otherwise, the IRS will come calling. You must file IRS Form 8919 for uncollected Social Security taxes and Medicare taxes.

Ask your company to take out those taxes. After all, it's the company's job. You know that now, and it's time the company did, too. Contact the IRS at 800-829-1040.

Q: My wife retired from the original AT&T, or "Ma Bell," before it was broken up. She worked from September 1959 to July 1969 and left two months shy of becoming vested in the company pension plan. She quit because her doctor thought she was having difficulty conceiving due to work-related stress. At the time, AT&T had a 10-year vesting policy for its pension. She had to work there for 10 years to be able to collect pension benefits when she retired. No one in management advised or reminded her of this policy. Otherwise, she would have remained with AT&T until she became vested. I have always wondered if she can somehow get credit for the two months she was shy of being vested. Does she have any recourse?

A: The fact that the company has morphed is the least of your problems. The Employee Retirement Income Security Act, which governs pensions, wasn't enacted until 1974. That law establishes workers' eligibility and vesting rights in their company's pension plans. Since your wife's employment predates that law, she can't look to it for help.

"There really isn't anything that law has that can protect this woman's retirement, even though she was only two months short," said a spokeswoman for the Employee Benefits Security Administration, which enforces ERISA.

She suggests your wife try to find contact information for the plan administrator and ask for the original plan documents. But even that could be difficult because documents that included detailed information such as a summary plan description weren't required until ERISA.

For more information call the Employee Benefits Security Administration at 866-444-3272.

(c) 2009, Newsday.

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