What You Need to Know When Handing Out Holiday Bonuses

As the holidays approach, you might be considering how to show your employees how much you appreciate them, and what a fantastic job they do all year long. A bonus seems in order, but how do you account for it with your accounting?

Different Bonus Types

Holiday bonuses fall into two different categories: cash awards and non-cash awards. Cash awards are exactly likey the sound - an award that is redeemable for a certain amount, for example, cash and/or gift cards. Non-cash awards are anything else - like a Christmas ham, turkey, or gift basket.

Like many business owners, you may be wondering:

  • Can I write off holiday bonuses?

  • Are there taxes associated with bonuses?

  • If so, who is responsible for them?

Giving a holiday bonus is always a plus, as you can write it off as a business expense. What you really need to understand is whether or not the bonus counts as taxable wages towards the employee.

Review the Guidelines

Cash bonuses must be reported on the employee's W-2 and are subject to regular payroll taxes. Make sure if you give your employee's cash bonuses or gift cards, you notify your payroll provider so they can account for the bonus on your employee's W-2.

Non-cash bonuses are not taxable do not apply to the employee's W-2 as they are not considered income. The IRS refers to the kinds of bonuses as "de minimis" and include things like small gifts, employee perks, meals, and company parties.

However, be careful as, like most things, limits do apply. And, the IRS will notice if you are using too many "de minimis" as benefits to avoid paying payroll taxes.

Your Rewards. Your Choice.

How you reward your employees is up to yo you - as you know, what your employees will respond too. A little reward can go a long way to thank your employees for a job well done, and that they are valued.

If you still have concerns regarding holiday bonuses, consult your tax accountant to learn what the implications are before rewarding your employees for a job well done.