Giving Bonuses and Gifts for your Employees
The end of the year is one of the most common times for a small business to give bonuses or gifts to their employees or contractors.
Of course, there are some rules that do need to be followed when giving bonuses or gifts to employees. This article will mostly focus on employees, individuals who are employed by your business, have payroll taxes withheld from their checks, and will receive a W-2 Form at the end of the year. The rules for independent contractors may be the same or similar in some situations, so we’ll highlight those differences at the end of each section.
Cash & Cash Equivalents
Whether you are considering it to be a “holiday bonus” for good cheer (equal across workers), a “year-end bonus” for a job well done (performance based), or a “gift” of either cash or gift cards, all of these are, in short, considered to be “wages” paid to your employees, are includible on their paycheck and subject to withholding.
There’s no “minimum amount” (also called “de minimus”) in order for it to be excluded from pay. If they’re an employee, and you’re giving them cash or cash equivalent (gift cards), it’s considered to be part of their payroll.
If you decide to pay your independent contractors a little extra, of either cash or gift cards, those also need to be included in their income. This amount would be included on their 1099-NEC.
Bonus Pay
Since bonuses are generally paid out in cash or checks, they follow the same rules mentioned above.
I know it’s really tempting to just throw in a $20, $50, $100 bill or a gift card into your holiday card to your employees, and forget about it. But you will need to add that onto their next paycheck in order to report it and take out taxes for the payment.
There are two ways to process the bonus payments on paychecks.
The first way is to pay a “gross-pay bonus.” This is when the bonus is before taxes and the paycheck they will actually receive will be less than their bonus. Let’s take a look:
BONUS – $100.00
TAXES – ($7.65)
NET – $92.35
Another way is to pay a “net-pay bonus.” This is when the employee gets to take home the intended bonus amount, and taxes are added to increase the gross pay amount. Let’s run through this way as well:
BONUS – $108.28
TAXES – ($8.28)
NET – $100.00
These are both only taking the standard Social Security and Medicare taxes, for simplicity purposes. If there are income tax withholdings taken, this would change the results.
Bonus pay can be paid out lumped with a regular paycheck, or you can process it as a separate paycheck. If you hand out cash and add it to payroll later, you’ll want to either process it with the “net-pay bonus” option (with a deduction for the cash bonus amount) or lumped with a regular paycheck so you can take out the taxes (again, with a deduction for the cash bonus).
For independent contractors, since there are generally no taxes withheld from their payments, you won’t need to worry about withholding taxes. But you will have to make sure that bonus is included on their 1099-NEC.
Gifts
If your plan is to give a non-monetary gift, there are different rules to follow. A non-monetary gift would be something like a gift basket, food items, or other merchandise items.
The IRS states that “if an employer distributes turkeys, hams, or other merchandise of nominal value to its employees at holidays, the value of these items would not constitute salary or wages.” These are considered “de minimus fringe benefits,” which means they are too minimal to consider. The only guidance for nominal value we really have is that it must be valued at less than $100.
Therefore, you are free to give out infrequent non-monetary gifts to your employees under this amount and exclude it from their wages!
De minimus fringe benefits can quickly cross over into taxable fringe benefits, so we do want to be sure that the amount is nominal, and that this is provided infrequently. If gifts are given or benefits are provided regularly throughout the year, they would no longer be considered de minimus, and would be includible in wages.
This would be the same for contractors as well. If gifts are given to contractors, make sure it’s of nominal value and given infrequently (like once a year), otherwise the value will need to be included on the 1099-NEC.
One last note to consider here with giving gifts is that your business cannot take a deduction for more than $25 per gift you give to each person during the year.
So, while you can exclude a holiday box of cookies that cost you $35 from your employee’s or contractor’s earnings, you can only take a deduction of $25 on your business tax return.
Giving bonuses and gifts should be an enjoyable part of your business! And giving cash bonuses are legal, as long as you follow the rules! If you have questions or feel overwhelmed about the rules surrounding these, please feel free to contact us and we’ll walk you through your specific situation.
No assurance is given that the information is comprehensive in its coverage or that it’s suitable in dealing with each individual’s particular situation. Kayla Prusinski does not hold a Certified Public Accountant (CPA) or similar license. This blog article is to provide general information only and does not constitute tax or legal advice, and cannot be used or substituted for tax or legal advice. Savvy Bird Consulting, LLC is not responsible for the implementation or outcomes this material may have.