From decorating and baking to visiting family and sitting down to dinner, there are many ways to enjoy the holiday season. As the year wraps up, consider bringing some holiday spirit to your workplace and express your appreciation and support to your staff with a holiday bonus.
When most people think of a holiday bonus, money comes to mind. However, other types of holiday bonuses exist. Below, you’ll learn about the benefits of sharing holiday bonuses with your team and find tips for making the most of these seasonal gifts.
A holiday bonus is a gift given by an employer to an employee during the holiday season. A holiday bonus can be a physical gift, extra paid time off or, most commonly, a monetary payment.
Holiday bonuses differ from year-end bonuses. With year-end bonuses, an employer typically considers the employee’s years of service, base pay or performance level. In contrast, holiday bonuses are usually distributed equally to all employees.
If you’re considering giving holiday bonuses to your employees this year, it’s essential to keep the following points in mind:
There is no average holiday bonus because they vary so widely among organizations. Many companies have moved away from cash bonuses. According to a 2022 survey from Skynova, one in 10 employers planned to skip cash bonuses. Some of these employers opted to replace bonuses with pizza parties or gift cards.
If companies do offer cash bonuses, there are vast differences in how they award them and how much they give. Some examples include the following:
“I pay my bonuses out based on two factors: the employee’s overall performance review and the number of years the individual has been with the business,” shared Laura Fuentes, operator at Infinity Dish. “I start annual bonuses at a minimum of 2 percent for the first year and max out at 6 percent.”
Monetary holiday bonuses can be paid in various ways. For example, you can provide a bonus as a stand-alone check or build it into your employees’ regular paychecks. You can also give physical gift cards or certificates. However, note that the IRS also taxes these bonus forms. It might be a good idea to work with your payroll service or accountant to ensure your bonuses are taxed properly and above board. (More on bonus taxes later.)
“In some industries, such as finance, bonuses are closely tied to employee performance and can vary dramatically within and between teams,” explained Andrew Schrage, CEO of Money Crashers. “Elsewhere, all employees of the same rank receive the same bonus. Amounts can vary from token-sized (think $25 or $50 gift cards) to amounts greater than the employee’s total regular compensation. The latter is more common among highly compensated executives and financial professionals.”
Just as every company operates according to its own procedures, companies also individually determine whether they want to award their employees holiday bonuses. A 2020 Bureau of Labor Statistics survey uncovered differences in holiday bonuses between companies with fewer than 100 employees and companies with more than 100 employees.
According to the survey, 9 percent of employees who worked at companies with fewer than 100 workers received holiday bonuses. However, companies with more than 100 employees were less likely to give their employees holiday bonuses. Only 3 percent of workers at these larger companies received a holiday bonus.
Holiday bonuses have many benefits for your employees and your business:
Because holiday bonuses are considered compensation, they are taxed. However, bonuses are taxed at a different rate than an employee’s salary on both the state and federal levels.
“Like regular payroll, bonuses are subject to income tax, Social Security and Medicare excise taxes and Federal Unemployment Tax (FUTA),” explained John Strohmeyer, proprietor of Strohmeyer Law. “But unlike regular payroll, bonuses are supplemental wages, which are generally subject to the mandatory flat withholding rate of 22 percent if the business has an annual payroll over $1 million. This rate may be higher than the employee’s normal withholding rate, which can confuse employees.”
Generally, the IRS requires a 22 percent federal income tax on all supplemental income, including bonuses. As an employer, you may choose to include your employees’ bonuses with their regular paychecks and withhold taxes on the total amount, which can result in a higher withholding. As such, it may be easier to give employees a separate bonus check.
Employees’ holiday bonuses are taxed at whatever rate is required by state law. Check your state’s tax rates to ensure accuracy.
The Federal Insurance Contributions Act (FICA) is a law that mandates a payroll tax on employees’ paychecks and employer contributions to fund Social Security and Medicare. The first $168,600 of annual income is subject to this tax, so your employees’ bonuses will be subject to this tax if they have not yet hit that amount.
Holiday bonuses can be a great way to express your gratitude toward employees, promote motivation and reinforce a positive work culture. Planning your bonus structures carefully well before the end of the year allows you to budget for them properly as well. This way, you can ensure a seamless and meaningful gesture that resonates with your employees long after the holiday season.
Shayna Waltower contributed to this article. Source interviews were conducted for a previous version of this article.