Ah, the holiday season is upon us and if you're new to the business owner's world, you may be considering giving your employees holiday bonuses this year. After all, it is the season of giving. And you'd like to show appreciation and thank your employees for their efforts over the past year. However, you may be asking yourself... Can my business afford a holiday bonus? What is the appropriate amount of a bonus? Will it have an impact on your or your employees' taxes? And, more specifically, what is a holiday bonus? Let's dive deeper...
What is a Holiday Bonus?
A holiday bonus is not the same as a year-end bonus. The former is simply a gift. A token of your appreciation given to all employees equally. Whereas an employer may consider years of service, performance, or base pay when determining a year-end bonus, these factors are not taken into account when determining a holiday bonus.
A few examples of holiday bonuses are:
A physical gift (apparel, gift cards, etc)
Extra time off
Prepare to answer to your employees, regardless of the system you choose. You'll be asked why you chose that amount, why so-and-so got more, and so on, so be prepared with clear, honest answers. Implementing a fair system makes sure that all employees feel valued, which is the purpose of the Christmas bonus in the first place.
How Much Should a Holiday Bonus Be?
Since businesses vary in size as a well as the amount of employees, there isn't exactly an average amount but there are some ways to help determine the amount. Businesses that do offer cash bonuses vary greatly in how they are awarded and how much they give. Some businesses award a percentage of an employee's salary, while others award a small, flat amount, such as $50 or $100, with the amount varying depending on the businesses performance that year. Some employers base bonuses on how long the employee has been with the business or their yearly performance.
Remember to keep your businesses finances in mind as well. If you can afford to give a monetary bonus then 100% do it but if money is tight be up front with your employees and find a different way to show your appreciation.
How Are Holiday Bonuses Paid Out?
There are several ways to distribute monetary holiday bonuses. For example, you can offer a bonus as a separate payment or incorporate it into your employees' regular paychecks. You can also give physical gift cards or certificates, but keep in mind that the IRS considers these to be taxable as well. It may be a good idea to consult with your payroll provider or accountant to ensure that your bonuses are properly taxed and legal. If you choose to give out a monetary holiday bonus, consider distributing it at the end of November or early December so they can use it for holiday shopping if needed.
How Are Holiday Bonuses Taxed?
Since bonuses are considered compensation, they are taxed, however, not at the same rate as a salary...
Federal Income Tax
The IRS requires a 22% federal income tax on all supplemental income, including bonuses. As an employer, you can choose to include bonuses in your employees' regular paychecks and withhold taxes on the total amount, which can result in a higher withholding. As a result, it may be easier to provide employees with a separate bonus check.
Each state has a different rate in which bonuses are taxed. You'll have to check with your state guidelines to determine this.
The Federal Insurance Contributions Act (FICA) is a law that requires a payroll tax and employer contributions to fund Social Security and Medicare. This tax applies to the first $127,000 of annual income, so your employees' bonuses will be subject to it if they have not yet reached that amount.
The Importance of Giving Holiday Bonuses
The most important part of giving holiday bonuses is that it makes people HAPPY. A holiday bonus, whether a large check or a couple of extra days off, shows employees that you care about them and value their contributions to the business. Bonuses also ensure that employees are rewarded for their efforts, which reduces the likelihood of burnout. Employees who are happier are more likely to stay with your business in the long run. Happy employees are also more productive and engaged which in turn can benefit your business.
Tips to Remember
Make sure the bonus is distributed evenly to all employees in your business. Everyone should get something, preferably the same thing as everyone else. This can help to boost morale and make employees feel valued.
If you are unable to provide monetary bonuses, consider other gifts, such as extra paid time off around the holidays.
Explain to all employees how the bonus program works so that there are no surprises during the holiday season. If you have an employee handbook, explain the bonus program, including how the bonus is calculated, what employees can expect to receive, when they might receive the bonus, and any conditions under which bonuses will not be offered.
If you've given holiday bonuses in the past but maybe can't swing it this year, be upfront with your employees ahead of time so they know what to expect. We saw what happen to Clark Griswold...
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