Chamber Chat - Holiday Bonuses

Dec 02

By Meg Moss


The National Federation of Independent Businesses (NFIB) recently released an article on “what small business owners should know about holiday bonuses.” The article shares that although it is the season to be generous, business owners do need to consider the precedent that holiday bonuses set. Consideration also needs to be given to bonus amounts, and taxes.


Many small business owners want to express gratitude to their employees – as both recognition for a job well done, and as a talent retention tool. “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.


Even so, holiday bonuses remain the exception rather than the rule. According to the Bureau of Labor statistics, only 38 percent of private sector employees have access to bonuses not related to their work production.


Business owners need to 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.


If you’ve decided to hand out holiday bonuses, 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. Every employee doesn’t necessarily need to get the same amount. If you are going to give out different amounts, there should be a consistent method used to determine the amount. At some places of employment, 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, realize that employees will likely talk and compare, says Milito. You can get in front of any hurt feelings or confusion about discrepancies by being upfront about how bonuses were determined.


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. 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.


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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