All bonuses for W-2 type employees are taxable for FICA, Medicare, and withholding. FICA is 6.2% (unless the employee has maxed out for the year), Medicare is 1.45% (2.35% if the employee has made over $200,000 in taxable wages for the year), and withholding.
The IRS includes bonus wages in its definition of "supplemental wages" in the Pub 15 (http://www.irs.gov/pub/irs-pdf/p15.pdf). Their guidelines stipulate that the Federal Withholding rate on supplemental wages amounting to less than $1,000,000 in a calendar year is 22%. Go over $1,000,000 in supplemental wages, and the rate should be equal to the highest rate of income taxation for that year (39.6% in 2017).
The Pub 15 also describes an alternate method which basically amounts to "put the supplemental wages in on the check with the regular wages and let the system calculate at whatever rate it will". Essentially, if you combine the bonus with the employee's regular salary (or hourly pay), the system will take the taxable wages for that check, annualize them (multiply by the number of payrolls you have in a year), and determine the employee's tax bracket accordingly. This will likely result in a higher withholding tax rate than the employee normally pays, but possibly still less than 25%.
If you decide to disregard the IRS guidelines on the topic* and would prefer to withhold less money from the bonus through payroll so that the employee gets more money in their net check, there are several ways you can go about it:
1. No withholding taxes. Simply block them in Payroll Processing > Payroll Entry > Individual Time Entry.
2. Withholding taxes based on an alternate pay frequency. Adjust to monthly, quarterly, annually, etc. to change the multiplier the system uses to annualize the wages, which will change the tax bracket.
3. Withholding taxes left alone. Put the bonus in and let the system calculate based on normal pay frequency and exemption status.
4. Withholding taxes at "normal" rate. Look at the employee's last normal paycheck, and divide the withholding tax amount by the taxable wages to get the withholding percentage. Override the amount accordingly in Individual Time Entry by blocking withholding and keying in the flat dollar amount you wish to have withheld from the bonus.
Following the IRS guidelines regarding supplemental tax rates will keep you out of trouble. If the employee underpays their taxes and gets audited, it's nice to know you followed the code!
Assuming you chose another method for determining the tax rate and the employee does file their taxes, any under- or over-withholding that occurs through payroll goes into a bucket of income earned and taxes paid, resulting in either a refund or a bill. (The W-2s themselves do not distinguish between supplemental and normal taxable wages.)
*Disregarding IRS guidelines isn't something that we generally recommend you do, but we also realize that you may have things worked out with your employees that require alternate tax rate arrangements. Use this work-around information wisely.
For information on grossing up employee bonuses, see "What is 'grossing up'?".