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What To Know Before Giving A Holiday Bonus: Guidance For Employers

by Debra Swift, MBA, SPHR on Nov 15, 2022 1:30:02 PM

As the end of the year approaches, you may be thinking about giving workers a holiday bonus to thank them for a job well done and boost morale in the process. If you’ve never offered this type of compensation before, you may be wondering what you need to know about holiday bonuses to decide if they’re right for your company. Here, we break it down for you.

In this article, we’ll address what holiday bonuses are, the types you can give, benefits to your business that these rewards can provide, and any compliance guidelines you need to consider. After reading this, you’ll be able to decide if awarding holiday bonuses for employees is the best approach for your business.

What is a holiday bonus?

A holiday bonus is a gift given to an employee during the holiday season. While holiday bonuses can take many forms, including physical gifts, gift cards, or extra days off, for the purposes of this article, we’ll focus on monetary payment since that’s the most common.  

A cash bonus is extra compensation that is above and beyond what a worker is normally paid. Often, the value of the bonus is a percentage of an employee’s annual pay. In that case, higher-paid employees would receive a larger bonus. Other companies award a flat amount to each employee.

It’s important to note that some companies pay out a holiday bonus only after a particularly successful year while others offer them every year, although the amount may differ based on the company’s profits. Either way, you’ll want to set expectations.

It’s a good idea to explain how the program works in the employee handbook and include information like what employees can expect to receive, how it will be calculated, and conditions under which a bonus may not be given. If you plan to discontinue bonuses, let employees know well in advance.

Is a holiday bonus the same as a year-end bonus?

While many businesses award holiday bonuses at the end of a year, they can actually be distinct awards. The key difference is that a year-end bonus is often tied to both overall company and individual employee performance. In addition, a year-end bonus may take into account an employee’s years of service.

If you plan to issue both, you may want to space them out so that employees aren’t confused or even dissatisfied by the awards. For example, you could distribute a performance-based year-end bonus in January.

What are the benefits of giving holiday bonuses?

Just like other types of bonuses, a holiday gift can deliver several important benefits to your employees and your business.

  • Improved morale: The most significant advantage of giving a holiday bonus is that they show employees that you value them and their contributions to the company. This recognition may help boost their satisfaction and, ultimately, their loyalty to your business.
  • Greater engagement and productivity: When employees are happy, they are 13% more productive. And extra compensation that employees can look forward to at the end of the year can make a difference in their happiness levels and motivation to help the company reach its financial goals.
  • Enhanced well-being: Many workers face added expenses during the holidays for things like gifts and travel, which can increase their stress levels. Easing the burden with a monetary bonus can help reduce their financial worries and show you care about their well-being.

Do I need to give a holiday bonus to all employees?

While other types of bonuses may be awarded based on performance, when it comes to holiday bonuses, to avoid a hit to morale, it’s a good idea to give them to all employees. Moreover, they should be equal for all or at least employee classification groups to avoid a claim of discrimination. For example, you may decide to give a 5% bonus to all. However, the amounts can vary between teams.

Are there any compliance guidelines for employee bonuses?

Depending on the type of employee bonus you award, it may trigger some compliance issues with employment laws and regulations.

For example, as we just mentioned, you’ll want to make sure holiday bonuses are provided on a non-discriminatory basis and that the eligibility criteria are applied in a non-discriminatory way.

If you have non-exempt employees, it’s important to note that discretionary bonuses are not part of an employee’s regular rate of pay under the Fair Labor Standards Act. That means it can’t be credited toward minimum wage or overtime compensation due.

Lastly, you’ll also want to be aware of the tax implications since, just like regular pay, bonuses are subject to income taxes, although the IRS classifies them as supplemental income.

When it comes to distributing holiday bonuses for employees, you can either give it as a stand-alone payment or a combined payment together with their regular wages. This choice will impact how taxes are withheld.

If you combine the bonus with employees’ regular wages in a single paycheck, you’ll withhold federal income tax the same way as you do with regular pay. But if you pay it as a separate payment, the supplemental income tax withholding rate is a flat 22%; if an employee receives over $1 million in supplemental wages, that rate is 37%. You’ll also deduct Social Security and Medicare taxes as well as any state income taxes no matter how much federal tax is withheld.

How to Decide if Holiday Bonuses are the Right Fit for Your Business

While year-end perks like a holiday bonus can be a good way to help retain talent in a tight market, they may not work for every company. If you can’t fit these awards into your budget, there are other options to consider that can show you value workers.

As we mentioned earlier, that could be extra time off during the holidays, closing down for a week, or simply offering greater flexibility. Or you could consider offering voluntary benefits at little or no cost to you. Read our next article on voluntary benefits to decide if adding these supplemental products is the right step for your business.

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