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Holiday Bonus Rules For Small Business Owners
Written by Tim Morral
With the end of the year quickly approaching, Workforce reports on the rules employers need to follow when it comes to holiday bonuses.
Holiday bonuses are a great way for employers to express appreciation and share the companies' success with employees. But some business owners and employers forget that holiday bonuses are still a form of employee compensation and need to be handled accordingly.
As employers take a closer look at their annual financial statements for determining compensation levels for next year and nailing down the size of this year's holiday bonuses, a recent Workforce report discusses several rules and guidelines that should followed when distributing and reporting bonus pay.
- Bonuses are taxable income. Even though bonuses fall outside of normal hourly or salary pay, they are still taxable income and need to be reported on the employee's W-2. Also, it's important for employers to remember to withhold FICA, federal and state taxes from bonus pay.
- Bonuses are usually deductible. Like other forms of employee compensation, bonuses are a deductible as long as they are considered to be an ordinary and necessary business expense. In general, bonuses need to be distributed as additional pay for work performed, rather than as gifts.
- Gift cards and gift certificates can be taxable income. Gift cards and gift certificates provided to employees may be taxable, unless they are classified as de minimis fringe benefits, i.e. benefits so small that it's impractical to account for them. Cash can never be classified as de minimis, but in some cases gift cards for minimal amounts (e.g. a free cup of coffee at Starbucks or a free movie ticket) can qualify for the de minimis exemption.
- Bonuses can be pro rata. When bonus plans are clearly defined or provided as an incentive for employees to continue to work for the company, they can become legally enforceable contracts that must be paid to terminated employees on a pro rata basis. However, employees who leave the business voluntarily are typically not entitled to any bonus pay.
- Bonuses must be fairly distributed. Holiday bonus programs should be fair for all employees. In addition to helping maintain employee morale, objectivity in holiday bonuses can help the company maintain compliance with fair pay and anti-discrimination laws.
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