Consider the precedent it sets, bonus amounts, and taxes.
‘Tis the season to be generous? It’s a question that’s top-of-mind for many small business owners in December as they look to express gratitude to their employees and retain top-performing talent. “Holiday bonuses are kind of a win-win, because not only does this let employees know that they are valued, they are also tax deductible for the business,” says Beth Milito, NFIB’s Senior Executive Counsel.
Still, holiday bonuses remain the exception rather than the rule. According to the Bureau of Labor statistics, 38 percent of private sector employees have access to non-production-related bonuses, such as Christmas, end-of-year, or profit-sharing bonuses. And it typically doesn’t make sense to award bonuses until your business is going to turn a profit for the year and has a healthy bit of savings in place to get you through any lean months in the year ahead, says Milito.
Setting a Precedent
Think about the possibility of setting a precedent for future years. “If you offer a holiday bonus once, it’s a nice gesture. If you do it twice, then employees are going to come to expect it,” Milito says.
If you’re not sure your business can afford to give out holiday bonuses every year, make sure to mention that this year’s bonus was tied to the company’s strong performance. “You’re making it clear that they shouldn’t come to expect it necessarily,” she says.
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Determining the Size of the Bonus
Once you’ve decided to hand out holiday bonuses, the next question is usually: what (or how much) will it be? In general, a cash or check bonus will probably be much more useful than a turkey or a fruit basket, says Milito. Around the holidays, in particular, employees are likely to be experiencing some “pocketbook issues,” she says, and even a small cash bonus they can spend at their discretion will likely be appreciated and remembered.
The size of the bonus should be tied to your company’s profitability and cash flow. There is no one-size-fits-all rule for what’s appropriate. A 2017 survey across several industries, by the firm Accounting Principals, found that one-third of businesses award holiday bonuses under $500. One-quarter dole out $500 to $999, and just over 40 percent give bonuses higher than $1,000.
Employees don’t need to get the exact same amount, although that’s certainly a popular option. But if you are going to give out different amounts, there should be a consistent rule of thumb used for everyone, recommends the United States Small Business Administration. At some companies, that’s as simple as giving everyone the same flat percentage of their salaries. At others, they might decide that managers receive a certain amount while entry-level workers receive a different bonus. Whatever method you decide, recognize that employees will likely talk and compare, says Milito. That’s appropriate, she says, but you can get in front of any hurt feelings or confusion about discrepancies by being upfront about how bonuses were determined.
Tax Considerations
As you calculate bonuses, keep in mind that this money is considered supplemental wages and is subject to income tax withholding and FICA. It will also appear on an employee’s W-2 form as taxable income. You can either include the bonuses in an employee’s regular paycheck and calculate withholdings the standard way, or you can withhold a flat 25 percent.
Whether you hand out cash or include the bonus in an employee’s check, they’re still going to have to report the income. Gift cards that have a cash value also need to be reported by the employee. Uncle Sam doesn’t care about small gifts (under $100), like turkeys, gift baskets, or fruitcakes.
For a profitable business that can afford to give out bonuses, doing so can strengthen loyalty, build goodwill, and boost morale well into the new year.
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