Year-End Bonus Guidelines: How to Do It RightPat Fontana
Tis the season for holiday celebrations and for deciding whether and how to give bonuses to your employees. As a small business owner, you may have had some challenges this past year. If you are in a position to continue to give your employees bonuses, you want to be sure to do it right. You can do so by following some basic year-end bonus guidelines.
A Challenging Year
The COVID-19 pandemic has affected most small business owners across the country. Some have had to close, either temporarily or permanently, but many have found ways to continue operating. As a small business owner, you may have found that you had to shift your business model somewhat or you may have received financial assistance through a number of available loan programs. Now you are thinking about providing a year-end bonus to your employees.
A recent survey conducted by Business Know-How asked other entrepreneurs about their plans for providing bonuses at the end of a challenging year. Only 41.6% of the survey participants said they would be giving a bonus this year. Some added comments such as “if I can afford it.” Although the number seems small, it is only slightly lower than the 42.8% who indicated they were giving cash bonuses at the end of 2019.
How Much to Give?
The survey questioned small business owners about how they would determine the amount of a bonus for their employees. Out of the survey respondents, 79% said they were planning to give a flat rate amount to employees, ranging from $20 to a high of $10,000. About half, however, said the amount would be somewhere between $100 and $500. Other responses included a plan to provide a percentage of the employee’s salary, such as a payment equivalent to a week’s salary.
Year-End Bonus Guidelines
There are some important points to keep in mind when determining whether and how to give employees a year-end bonus. First, use the term “holiday bonus” or “year-end bonus” instead of “Christmas bonus.” Not all of your employees celebrate Christmas, particularly when you have a diverse team. In addition:
- Distribute bonuses equally to every employee in your organization. Every employee should receive something, whether you decide to give a flat amount or a percentage of salary. Making sure everyone is included will improve morale as all employees will feel more valued.
- If your budget just doesn’t include room for financial monetary bonuses, consider other gifts, such as extra paid time off.
- Map out a plan for the year-end bonus and share that plan with your employees. It will also help to put it in writing, such as in an employee handbook, so there are no misunderstandings. Be sure to include any conditions under which bonuses will not be offered, such as during a global pandemic.
- If you simply cannot or choose not to give bonuses, let your employees know as early as possible. They are already buying gifts for their friends and family and need to know whether they can count on a financial year-end bonus.
Among the most important year-end bonus guidelines is the fact that any financial bonus you provide your employees will come with tax considerations. You can pay the bonus as a stand-alone check or build it into your employees’ regular paychecks. If you choose to give gift cards or certificates instead of a check, keep in mind that these are also taxable.
On the federal level, the Internal Revenue Service (IRS) requires a 22% federal income tax on all supplemental income, including bonuses. When you include your employees’ bonuses with their regular paychecks and withhold taxes on the total amount, that can result in a higher withholding rate. It may be easier to give employees a separate bonus check.
For employees who have not yet earned $127,000, the Federal Insurance Contributions Act (FICA) law also applies. FICA law mandates a payroll tax on employees’ paychecks and employer contributions to fund Social Security and Medicare.
The year-end bonus will also be subject to the appropriate state taxes. In Arizona, all wages, salaries, bonuses or other compensation paid for services performed in Arizona are subject to state income tax withholding, with exceptions.
Your generosity can get complicated. To be sure you are following appropriate year-end bonus guidelines, consider working with an expert accounting firm who can help you make sure your bonuses are properly taxed and aboveboard.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR HELP
At Clear View, our experts make complex financial data and business solutions understandable for you so you can plan for success. We know that this year has been a challenge for many small business owners and solo-preneurs and we are here to guide you with professional business advisory services, tax planning and preparation, accounting, and bookkeeping. Learn more about how we can help you and your business by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.