Tackling the Holiday Bonus Question: A Guide for Employers

Should you give your employees a holiday bonus? That's a perennial question among many business owners.

As the season of giving approaches, you may be wondering about the best way to thank your employees for their hard work over the last year. While a bonus is feasible for some businesses, others utilize different ways to celebrate their staff around this time of year.

If you decide to give a holiday bonus, how much is appropriate? Is doing so the same thing as giving a year-end bonus? The answers aren't simple and can vary from one business to another. Here are some commonly accepted holiday bonus guidelines that can help you determine what's most appropriate for you and your employees.

What is a holiday bonus?

A holiday bonus can generally be described as a gift expressing gratitude, which is given equally to everyone. Years of service, base salary, or performance are often considered when determining a year-end bonus but rarely considered when deciding what holiday bonus to offer. Holiday bonuses can range from a personalized, company-specific gift, to an extra day off, or a monetary award given around year-end.

"There are some potential issues with tying a bonus to religion-specific holidays," notes Paychex HR services area manager Matt Keup. "Using a generic term like 'holiday employee bonus' may be preferable to a using a specific religious holiday title like 'Christmas bonus.' That being said, a holiday employee bonus should be equal for all, at least across employee classification groups."

Most experts agree, strongly advising that everyone in the business should receive a bonus of some kind, if bonuses are being distributed. Otherwise it can feel demoralizing for those left out when bonus time rolls around and may even lead to claims of discrimination.

Consistency is one of the best practices when it comes to a company's holiday giving. Any changes to the type or amount of bonus have the potential to raise questions among employees. That's why it's wise to set expectations early, whether you give a monetary amount or a small handout like a holiday gift basket.

If your company does award bonuses and it was an exceptionally great year profit-wise, you may consider adding to the typical bonus amount. In the case of a one-time increase, it helps to explain why — perhaps with a simple note saying, "We had a great year, so here's something extra."

As with all company expenses, holiday bonuses should be included in the annual budget to ensure they're covered. Although they may be a surprise to employees, the cost should be planned in advance and never a surprise to management.

Tie performance-based bonuses to results

In contrast to a holiday employee bonus, a year-end bonus is usually more specifically performance-based, and may be intended to boost motivation as the year comes to an end (or to get employees revved up for the new year).

"The place for driving performance results from employees is more properly associated with incentive plans that have defined goals," Keup says.

One way to avoid confusion is to extend the period of time between giving out a bonus tied to holidays and a year-end bonus. The latter might be provided in January of the following year, with the holiday employee bonus pegged closer to Thanksgiving or prior to Christmas.

Bonus percentages are flexible

One system for determining bonus percentages can revolve around specific milestones an employee reaches during the year.

For example, notes Bizfluent, "Your business may offer employees 10 percent of each sale they make, or 10 percent of each sale once they reach a daily threshold of $400." Or when a company has a specific goal in mind, it can "award bonuses to all employees once a specific sales target has been reached." In such situations, there's the option of "giving an equal bonus amount to each worker or dividing a total bonus amount based on specific criteria that you have established beforehand such as the number of hours worked, number of years with the company or team sales figures."

For holiday bonuses, some companies choose to give a flat dollar amount to each employee, which can vary by industry and business profitability.

Monetary rewards are, of course, always desirable, but non-monetary gifts are often welcome as well. These might include:

• Paid time off, particularly around the stress-heavy holiday season.
• Company swag, such as luxury-branded apparel.
• Gift cards to a local movie theater, restaurant, or fitness center.

Bonuses and awards "help employee engagement by being easily identifiable by employees as tangible appreciation of them as individuals," Keup adds.

Employee bonuses and tax implications

Any monetary bonus must be reported on an employee's W-2 form as taxable income. Remember that giving an hourly employee paid time off has the same tax consequences as if the employee was actually on the job during that time, meaning that the pay is reportable and taxable.

Some employers opt to pay both the holiday bonus amount and the tax amount, depending on arrangements made with employees. Also, some bonuses are included when calculating an employee's regular rate of pay for overtime purposes (typically, discretionary and holiday bonuses are not included, however non-discretionary bonuses are).

If you give employees holiday bonuses or gifts, make sure you understand how they will be reported. Year-end gifts in monetary form can be recorded as supplemental income or a discretionary reward. Smaller, non-monetary holiday gifts worth less than $100 (such as a holiday basket or a personalized gift with the company logo) are typically considered a de minimis fringe benefit and are not taxable. However, according to IRS guidance, gift cards or gift certificates are taxable.

As for timing, holiday bonuses are generally awarded before the year ends to be included in the current year's expenses.

Company cultures can vary widely, and a formal holiday or Christmas bonus may or may not be the best way to reward your employees at the end of a year. Before spending the money, it helps to consider the other ways your company may celebrate the holidays — with an office party or extra time off, for example. If you end up giving out bonuses, don't forget to account for them as part of your year-endpayroll and benefits planning.