The end of the year brings holiday cheer. It also brings the unique opportunity to thank your employees for their hard work with the gift of year-end bonuses. When you think of holiday bonuses, the classic “holiday ham” might come to mind—but the bonus is often a lump sum of cash, too. Year-end bonuses are an incredible opportunity to show your employees gratitude—you just need to make sure you’re doing it in the right way.
Here’s everything you need to know about year-end holiday bonuses.
Why Give a Bonus?
While bonuses used to be a holiday norm, they’re overall becoming less and less relevant. According to the Holiday Bonus and Hiring Survey by Accounting Principles, in 2017 only 63 percent of companies planned to give employees a monetary holiday bonus, down from 75 percent in 2016. Still, many employers choose to gift year-end bonuses to their employees as recognition of their dedication throughout the year.
Bonuses, though obviously placing a financial burden on the employer, are a powerful tool for retaining top talent, and encouraging productivity as well as overall engagement in the company’s mission and goals. They improve morale. As an employer, you can grant company-wide bonuses or bonuses based on personal performance. Just remember that depending on your choice, you’ll be liable for taxes. We’ll get into the financial nitty-gritty down below.
How to Give a Bonus
When it comes to bonuses, stand by this rule—don’t make promises you cannot keep. You don’t want to encourage productivity and set lofty goals, only to drop the ball when employees ask for a reward for their work. Don’t mention a holiday bonus if you don’t intend to follow through.
Some employers like to lay out a bonus structure clearly in their employee handbook. This can clearly state performance objectives and metrics for year-end bonuses. You can provide bonuses based on a percentage of employee salaries, based on personal performance regardless of salary, or on sales commissions, if relevant. Remember that while no one is going to turn down an extra chunk of money, non-monetary bonuses can be helpful, too.
Ideas for Non-Monetary Bonuses
Studies have shown that non-monetary bonuses are a better way to encourage long-term engagement than monetary rewards. So, they’re a strong option when you’re choosing year-end bonuses. They’re also strong options for pairing with a cash incentive. Here are other non-monetary bonus options you can consider for your employees:
- Donations to charity on their behalf
- Company swag (mugs, t-shirts, water bottles, etc.)
- Learning opportunities (conferences, classes, or lectures)
- Flexible schedules (work from home days, early-leave days)
- Parking (if not already provided)
- Office supplies (like a second monitor or ergonomic keyboard)
- Verbal affirmations (recognition and praise, even if in the form of a note)
- Family gifts (turkey, ham, meal options, gift cards, show tickets)
- Extra time off
- Gift baskets (think: fruit, wine, crackers, chocolate)
- Added office perks (unlimited coffee, catered lunches once a week, etc.)
- Flowers/ plants
We could go on and on, but hopefully, we got the ball rolling here. Get creative!
Financial + Tax Requirements for Year-End Bonuses
For financial purposes, there are two types of bonuses: discretionary and non-discretionary. A non-discretionary bonus is one that’s announced in advance—usually to motivate them to meet year-end goals or encourage employee retention. These bonuses are awarded based on a criterion set by the employer. Discretionary bonuses, on the other hand, are not promised in advance. They’re typically awarded to employees regardless of set criteria or performance metrics. Most bonuses are non-discretionary.
When it comes to overtime, non-discretionary bonuses must be included in calculating an employee’s regular rate of pay. Discretionary bonuses don’t need to be included when you’re calculating overtime. For non-discretionary calculations over a long period of time, the bonus should be included in the regular pay rate for all overtime weeks covered by the bonus. If the bonus is awarded in a single week, only add the bonus to that week’s pay rate.
It’s important to remember that cash bonuses are taxable by the IRS, and do have to be reported. Yep—that means you need to deduct all applicable state, federal, and local income and FICA taxes. Other bonuses that are easily traded for cash (think: gift cards, gift certificates, show tickets) are also considered taxable, regardless of the amount.
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