THE VIRGINIAN-PILOT  
              Copyright (c) 1994, Landmark Communications, Inc.

DATE: Wednesday, December 14, 1994           TAG: 9412140426
SECTION: BUSINESS                 PAGE: D1   EDITION: FINAL 
SOURCE: BY LON WAGNER, STAFF WRITER 
                                             LENGTH: Medium:   52 lines

IRS TAKING A BIGGER CHUNK OF YEAR-END BONUSES IN 1994 IF YOUR BONUS WAS $1,000 IN 1993, YOU RECEIVED $800 AFTRE TAXES. IN 1994, WITH THE SAME BONUS, YOU RECEIVED $720.

Employees who get end-of-year bonus checks may notice they're taking home less this year.

For that, they can thank a perennial grinch - the IRS.

When Congress passed the Revenue Reconciliation Act of 1993, it required companies to withhold 28 percent of bonuses, instead of 20 percent.

People who are paid sales bonuses discovered this tax-law change last January, when it became effective. But those getting annual Christmas bonuses this month are just figuring it out - the hard way, when they look at their checks.

Jim Prince, with accounting firm Frederick B. Hill, said that Congress reasoned that a 28 percent withholding rate would more closely line up with the taxes most people ultimately will owe on the bonuses.

Larry McKoy, a partner at Goodman & Co. accounting firm, put it more dryly.

``The government has always had a position that when you get money, they want their piece,'' McKoy said. ``They've upped the ante, where if you get money, they get their piece right away.''

There is an upside. By withholding more upfront, bonus recipients shouldn't get stung by the tax man in spring.

The government for the past few years has been trying to track down people who don't file tax returns. McKoy said that increasing the withholding rate on bonuses is part of that program.

Some companies were paying bonuses in January, which meant the recipient could postpone paying taxes until April of the next year.

``One of the things they've always had a hard time with is when you get a bonus in the beginning of the year, by the end of the year you don't have any cash left,'' McKoy said.

The change in the tax law gave employers two options: They can withhold 28 percent, treating the bonus as supplemental income; or they can add the fringe benefits to the employee's regular wages and withhold taxes on the total amount.

McKoy said the IRS gets its own fringe benefit out of this setup.

``It also forces the employer to be the policeman,'' he said. ILLUSTRATION: Color drawing by Janet Shaughnessy

by CNB