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Navigating Holiday Bonuses: Your Guide to Tax-Savvy Celebrations

by | Dec 15, 2023 | Compliance

Happy Holidays Everyone!  Since we’re at the end of the year, let’s talk about staff bonuses and gifts.  I see this mistake happen all the time and because it involves payroll taxes, it can mean BIG trouble for your business.

No matter how small the amount, cash bonuses are subject to payroll taxes!

So, if you give out Christmas or performance bonuses to your employees, those need to be run through payroll and have taxes deducted.

Another thing to be aware of is that if the bonuses are expected, either through a contract or just the regularity of always giving a holiday bonus – those amounts are considered nondiscretionary.  Meaning that they would be included in the calculation of overtime for the pay period in which they were given.

Noncash gifts:  Taxable vs. Nontaxable

Taxable:  Cash or cash in kind (aka gift certificates) for ANY amount are wages subject to payroll tax.

Nontaxable:  If given infrequently – food, wine, flowers, tickets to shows or sporting events (but not season tickets) are considered de minimus (nontaxable) fringe benefits.

Example:  a turkey given at Thanksgiving is nontaxable, but a gift certificate for a turkey is taxable.

Holiday Parties or Summer Picnics

Good news!  Company parties are 100% deductible to the business (instead of the usual 50% meals deduction) and completely nontaxable to the employees.  Again, make sure these are infrequent and are given to promote employee health/goodwill/morale.

I hope this helps clear up any confusion on taxable vs. nontaxable gifts.  Another tip is that you can “gross up” your bonus amounts.  For example, if you wanted the employee to receive $500 exactly, you can calculate the amount of taxes that would be withheld and add that to the gross number.  Ask your payroll company or tax professional for help if that’s the direction you want to take.

I hope everyone has a very happy holiday season and a prosperous new year!

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