When a stipend or bonus is paid only once or twice a year, the tax withholding needs to be taken into consideration. The employee does not want the bonus check to be consumed in taxes and you, the bookkeeper, need to confirm that the stipend is set up in such a way that the estimated tax withholding for the entire year is figured correctly.
When a stipend is divided evenly over the entire year, you can use the same full-year PPG on the regular position and the stipend position.
The Importance of Pay Frequency
Pay Frequency Override
Recommended Pay Period Group Setup
Variations
The Importance of Pay Frequency
When calculating each employee’s tax withholding, the software starts by multiplying the taxable wages in the pay period by a pay frequency for the year. By default, this pay frequency number comes from the number of pay periods in the position’s pay period group.
To explain the effect on tax withholding, imagine a teacher paid monthly, who has $4,000 of taxable pay each month. In a normal pay period, her estimated yearly taxable wages would be $48,000 ($4,000 x 12 pay periods in the PPG).
If she receives a $2,000 coaching stipend in October, in the same 12-month PPG, then the October payroll would estimate her yearly taxable pay as $72,000, as illustrated in the table below. Depending on the particulars of her W-4, that could cause significantly more to be withheld from her check.
| Position | Taxable Pay | Pay Frequency | Estimated Yearly Taxable Pay |
| Salary | $4,000 | 12 | $48,000 |
| Stipend | $2,000 | 12 | $24,000 |
| Total | $72,000 |
However, if you add the stipend to a PPG with only one pay period, then the tax calculation will understand that the $2,000 is only received once, and will estimate her yearly taxable pay as $50,000.
| Position | Taxable Pay | Pay Frequency | Estimated Yearly Taxable Pay |
| Salary | $4,000 | 12 | $48,000 |
| Stipend | $2,000 | 1 | $2,000 |
| Total | $50,000 |
That difference in Estimated Yearly Taxable Pay can cause an employee to jump to a higher tax withholding bracket, meaning a greater percentage of their pay would be withheld.
For this reason, one option that would reduce tax withholding is to create a pay period group with only the one pay period on which the stipend is paid out.
Pay Frequency Override
At most districts, stipends/bonuses may be paid out to different employees at random times throughout the year, so it may be inconvenient to create a separate Pay Period Group for each case.
Instead, you can create a single PPG that contains all the pay periods for the year, but has a special setting telling the program to override the number of pay periods and substitute a different pay frequency to use in the income tax withholding calculation.
The Calculate Salary Percent field performs that override. If you enter a number in Based upon ___ pay periods, that number will be used as the pay frequency instead.
However, this field also changes how salary is divided out across the year, so never assign salary items to this PPG. The default setup would pay out 100% of the salary on every single pay period, instead of a fraction of the salary. Other wage algorithms, like Amount Series, Simple Amount, and Hourly can be safely assigned to this group if they are expected to be paid only once a year.
Recommended Pay Period Group Setup
Given the above factors, the most typical setup allowing for maximum flexibility and avoidance of unnecessary additional tax withholding, is to create a Pay Period Group that includes all pay periods for the year, but with an override so the taxes are calculated as if the wage is only received once per year.
To create a new stipend/bonus pay period group:
- Go to Financials Main > Payroll > Pay Period Groups
- Create
- Enter a name like “Stipend/Bonus” in Description field
- Select “Based upon ___ pay periods”
- Enter a 1
- Select all your pay periods
- Save
- When you see the warning “Since the sum of the salary percent is greater than 100%, the total amount paid across all pay periods will be more than the annual salary,” select Yes
Variations
Many variations upon this setup are possible depending on the particulars at each district.
Some districts that use separate pay periods for certified and non-certified staff may find it easier to organize the data into one PPG for certified stipends and one for non-certified stipends (e.g. two groups of 12 monthly pay periods instead of one group of 24 monthly pay periods).
Some districts may split coaching stipends over two pay periods: one at the beginning of the season, and one at the end. In that case, the calculate salary percent value can be set to Based upon 2 pay periods.
Some districts may have a more rigid timeline for paying out stipends, e.g. once per quarter. In that case, you can sacrifice the flexibility of adding the full year’s pay periods and instead choose only the four quarterly payout dates.
If you have questions about your specifics at your district, you may contact SchoolInsight Financials support.