If you are an employer and want to gain instant popularity with your employees, hand out bonuses at the end of the year, or any other time, for that matter. Along with showing your appreciation for their hard work, bonuses also demonstrate that you are willing to share your company's success with all those who are making it happen. According to recent surveys, almost 80% of all businesses in the U.S. plan to give their employees some form of a bonus during a typical year. But before handing out employee bonuses, here are some things you and your employees should know.
Business Tax Deduction
First of all, remember that employee bonuses do have tax implications. For example, as an employer giving your employees a bonus, you are allowed to deduct this as a business expense on your tax returns, where they come under the category of "payments to employees." However, if you give out bonuses to some employees but not everyone, make sure you are able to explain your reasons for doing so. Otherwise, you could be hit with allegations of discrimination or favoritism.
Avoid Giving a Bonus to Yourself
While you may think you could provide a bonus to yourself, the IRS tends to think otherwise. In fact, bonuses are not considered to be deductible expenses if your business is a sole proprietorship, partnership, or an LLC. In essence, if you are considered to be self-employed by the IRS, Giving yourself a bonus isn’t the way to go.
Taxable Income for Employees
When it comes to your employees who receive the bonuses, they need to remember that the extra income you have given them is still considered by the IRS to be taxable income, no matter whether it is a signing bonus, year-end bonus, or another type of bonus. Because of this, any employee who gets a bonus is required to pay state and federal income taxes, as well as FICA taxes.
Bonuses and Employee Withholding
Should you decide to give your employees a bonus, it is only natural that they would want to keep as much of the money as possible. To help them do that, you as their employer can allow them the chance to change their withholding for their bonus check, then switch back to their usual withholding for their regular paychecks. Referred to as "grossing up" the bonus check, this lets your employees keep more of their bonus, even after they have paid income and FICA taxes.
Does a Bonus Always Have to be Cash?
While you and your employees usually think of bonuses as cold, hard cash, it doesn't always have to be this way. Actually, many employers give their employees many different types of bonuses. Technically, a bonus is defined as anything that is given or paid to someone that is over and above that which is actually due to them. Thus, your bonus to employees could take the form of a turkey for Thanksgiving, gift cards for local restaurants or other establishments, vacations, or anything else you may want to give. But no matter what type of bonuses you provide, always remember to deduct them as business expenses at tax time.
Performance Bonuses
At many companies, employers often prefer to structure their bonuses as performance bonuses, meaning they are linked directly to how productive their employees have been throughout the year. Generally, these bonuses are given to employees who meet sales quotas or complete an important project before a specified deadline.
Holiday Bonuses
In case you didn't know, over 90% of U.S. companies give out holiday bonuses to their employees each year. Since everyone tends to be in a good mood over the holiday season from Thanksgiving to Christmas, employers use this as a time when handing out bonuses builds up much goodwill. If you and your company are part of this group, continuing to do this each year not only gives your employees something to look forward to at year's-end, but also demonstrates you care about them and their families.
Year-End Bonuses
While holiday bonuses may happen regularly at the end of each year, they are not actually known as year-end bonuses. Rather, these types of bonuses are often given to employees after a company has had an exceptional year financially. Thus, if your company sailed past the competition and sold more products or services than you ever thought would be possible, sharing the wealth with your employees will give everyone incentive to do better and better.
Rewarding Loyalty and Seniority
If there is one excellent benefit bonuses provide to employees, it is rewarding them for their loyalty to a company. Thus, when considering how you want to structure your bonuses, you can take the approach of giving higher bonuses to those employees who have been with you for many years and have achieved high levels of seniority. By choosing this type of bonus structure, you will give your employees far more incentive to stick around for decades, rather than look for new employment opportunities.
Milestone Bonuses
In every person's life, various types of milestones take place. These can include birthdays, wedding anniversaries, the birth of a child, and so forth. For some employers, these important life events are seen as excellent times to hand out bonuses. For example, you can create a company policy stating that all employees will receive a $100 bonus on their birthday, or perhaps $200 when they welcome a new addition to their family. Since this type of bonus structure offers much flexibility and can apply to all employees in one way or another, it is a popular trend in today's business world.
Once you understand the various tax implications of employee bonuses, you will see the pros definitely outweigh the cons. To keep your company growing, it is vital you make sure employees from the top on down feel valued and appreciated each and every day while on the job. By giving out bonuses that are fair and equitable, you can accomplish that and much more. Be sure to talk with your CPA before giving out bonuses, to be sure you organize the transactions correctly.