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Gifts and Holiday Bonuses – What Business Owners Should Know

Updated: Dec 15, 2020

The holidays are here, but the days leading up to 2021 will not be filled with holiday parties or corporate celebrations. The promise of year-end bonuses also looks bleak for many employees. Here’s what business owners should know about holiday bonuses, non-cash gifts, and what can be expensed.

Holiday bonuses

Giving holiday bonuses has long been a way for employers to show their employees appreciation. Prior to doling out holiday bonuses or other gifts, employers need to think very carefully about messaging and how they’ll give.

The last thing veteran employees want are coupons for turkeys while new hires get $3,000 bonus checks (looking at you Amazon).

To simply express thanks to your employees, consider giving everyone the same amount or give one amount to full-timers and a different amount to part-timers.

Bonuses could also be given based on sales performance, years of service, or base salary.

Do you have to pay taxes on a holiday bonus?

Both employers and employees have to pay their share of taxes on cash bonuses.

Take the taxes into account when giving cash to employees.

For example, say you’d like to give each employee a $500 holiday bonus. Add taxes to the $500 so your employee actually goes home with $500 instead of $375.

Give a separate holiday bonus check to employees that is distinct from their regular paycheck. This will emphasize the amount of the bonus and make calculating taxes to be withheld easier.

Can your business afford to give?

Determining how much of a bonus your business can afford to give depends on cash flow and what your bottom line looks like toward the end of the year.

Speak with your accountant to determine what’s feasible. If you’re ending the year with a profit, giving employees bonuses is an excellent way to show appreciation while reducing your tax bill.

What are some ideas for non-cash gifts?

If your business forgoes holiday bonuses this year but decides to give non-cash gifts, here are a few you can consider.

- An extra paid day-off in 2021

- A holiday gift basket

- Other ‘non-entertainment’ gifts like a bottle of wine, board games, puzzles, flower arrangements, or clothing.

What expenses are qualified?

Before you spend a lot on non-cash gifts, be sure to know what you can pass through your business.

The IRS allows businesses to deduct no more than $25 for the costs of gifts per recipient, whether that be an employee or a client.

Incidental costs including engraving, packaging, and shipping are not subject to the $25 limit.

Here’s an example, business owner Andy is giving each of his five employees a gift basket valued at $40. Shipping the baskets to each household costs $15. Andy can deduct a total of $200 as a qualified business expense à the five gifts at a limit of $25 per gift plus the $15 per gift in incidental shipping costs (25x5) + (15x5) = 200.

There’s your rudimentary math problem for the day.

This year has been tough on everyone, small businesses especially. With that said, small business owners continue to be some of the most generous when it comes to their employees.

Happy Holidays!

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