Your Employer Guide to Holiday Bonuses

‘Tis the season for Grandma’s plum pudding, eggnog, and driving your Uncle home after he’s consumed a little too much of both. Here’s something else that a lot of employees look forward to this time of year: holiday bonuses. If you’re an employer, you might be wrestling with your decision to give a holiday bonus or not. It’s the season of giving after all. And you want to thank your employees for all of their hard work over the past year. But is it feasible for your business? How much of a bonus is appropriate? Will it affect your or your employees’ taxes? And how, exactly, do you define a holiday bonus? Let’s take a look at some holiday bonus guidelines that might help you with your decision.

What Is a Holiday Bonus?

A holiday bonus is different from a year-end bonus. The former is simply a gift. A token of your gratitude that is distributed equally to all employees. Whereas an employer might consider years of service, performance, or base pay when determining a year-end bonus, those things are not factored into a holiday bonus. Holiday bonuses can take a few different forms:

• An extra check given around the holidays.
• A company-specific gift.
• An extra day of leave.

Regardless of which type of bonus you choose to give, there are a few important things to consider. First, don’t tie your bonus to any particular religious holiday, unless you run a religious organization. For example, it’s better to call it a “holiday bonus” than a “Christmas bonus.” And second, it’s important that you give the same bonus to every employee, or at least across a class of employees. And if you give out holiday bonuses at all, then every employee should receive something. It can feel demoralizing if all of your coworkers receive a bonus and you don’t. That’s not something you want for your team.

Don’t tie your bonus to any particular religious holiday, unless you run a religious organization.

How Much Is the Average Holiday Bonus?

In 2015, a Houston oil and gas company called Hilcorp famously gave all 1,381 of its employees a $100,000 Christmas bonus. You don't need us to tell you that this kind of bonus isn't feasible for most companies. According to a survey by Accounting Principals, an accounting and finance temp agency, the average holiday bonus is $858. About one out of every five bonuses is $1,000 or more, and 15 percent are under $100.

Other Types of Bonuses

Like we mentioned above, not all bonuses are created equal. Unlike holiday bonuses, in which employers generally give the same amount to all employees, year-end bonuses can vary. Here are a few examples of bonuses that employers might hand out.

Performance-Based Bonus

A performance-based bonus is a type of additional compensation that you pay to an employee as a reward for achieving predetermined goals or targets. Often, these targets are laid out in an employees’ contract, but that is not always the case. An employer can decide to institute a performance-based incentive program at any time. For example, an employee might earn a $1,000 bonus for every $100,000 in sales he brings in. Or an employer might have an incentivized “drive” during their busiest season when employees could earn a bonus for signing on a certain number of new clients or selling a flagship product.

Percentage-Based Bonus

This is sometimes referred to as a “profit sharing” bonus. Your company might set aside a certain amount, typically 2.5 to 7.5 percent of payroll, as a bonus on top of base salary. The bonuses vary based on company profits, and employers often award them in larger percentages of compensation to employees with larger salaries. When businesses offer profit-sharing bonuses, they hope that it will help employees understand how their work affects the company's performance and profitability. The goal is to encourage employees to learn how the company makes money and how each staff member can help it make more.

Spot Bonus

Sometimes, employers may want to reward their employees “on the spot” for achievements that warrant special recognition. These bonuses are typically $50 to $1,000. A supervisor or any manager can hand them out, and they usually do so publicly so that everyone on your team can see how hard work pays off.

Non Cash Bonuses

Think “employee of the month,” or something similar. Some people might find these programs cheesy, but they don’t have to be. Have an all staff meeting and invite the honored employee to the front of the room to receive applause. Be sure to make a short speech detailing all the ways that employee has contributed to your company’s success. Make them feel proud. It’s also a good idea to include some sort of tangible reward. It can be a plaque, a gift certificate, an extra day of leave, or a coveted parking space.

How Are Holiday Bonuses Taxed?

All bonuses are considered compensation, so like your salary, they are also taxed. But how big of a bite will the tax man take? Let’s take a look.

Federal income tax

In most cases, the IRS requires a federal income tax of 25 percent on supplemental income, which includes bonuses. Some employers will include bonuses with the employees’ regular paycheck and withhold taxes on the whole amount. This often results in an even higher withholding. In that case, the employee can get some of it back with their return. But to make things easier, you might want to issue a separate check for bonuses.

State income tax

In states where there is a state income tax, bonuses are taxed at whatever rate is required by state law.

FICA

The first $127,200 of a person’s annual income is subject to social security taxes. So if your employees have not yet earned that amount, their bonus will be subject to the social security tax of 6.2 percent. Medicare taxes apply to all income, so the entire bonus will be subject to that 1.45 percent tax. When the holidays roll around, many employers want to thank their employees for a year’s worth of service with bonuses and other gifts. We hope this guide helps you to determine what type of bonus to give, and how to distribute them to your employees.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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