The holiday season is almost here, which means it’s time to decide how to celebrate your workplace. Your employees have worked hard this year, and you want to show your appreciation. While a cash bonus is traditional, it also counts as taxable income according to the Internal Revenue Service (IRS).
Your team deserves more than a slashed bonus. To help you out, we’ve compiled a list of eight holiday bonus alternatives that are either tax-deductible or subject to reduced tax implications.
The IRS considers holiday gifts within a reasonable price range to be de minimis fringe benefits, which means their value is too small to reasonably tax. Many companies stay at around a $75 maximum for their employee gifts. If you plan to give to clients, however, staying at a $25 maximum will help you avoid taxes.
By distributing physical gifts, you can give back to your employees without worrying over additional tax paperwork. You also might get a discount if you buy certain items in bulk.
Gifting company swag to your team is an excellent option for large businesses, especially since you might already have a lot of it on hand. IKEA made headlines for one of its employee appreciation presents. In 2010, the Swedish furniture company sent 12,400 custom all-terrain bikes to its employees as a holiday bonus.
If you have a particularly small or close-knit team, consider tailoring your gifts for each employee. A customized gift basket filled with self-care goodies or merch from their favorite sports team could brighten their day and show you care.
Of course, the key to personalized gifts is knowing your recipient, which is why customized bonuses are best for smaller teams. Gift cards or certificates might be a more practical choice for larger or remote teams.
The IRS considers gift cards to be a type of supplemental income, meaning they are taxable and must be reported on an employee’s W-2. Employers have two choices to make sure their employees get the full bonus:
If you’re determined to go the gift card route, make sure you file the relevant taxes correctly and on time. A small business tax attorney or accountant can help simplify the process for you so you can focus on your holiday sprint.
If it’s appropriate for your workplace, consider throwing an office party. Workplace celebrations can help bring your team closer together and strengthen company culture. Additionally, they provide more opportunities to give out mini-bonuses if you desire, like door prizes or a raffle.
The Consolidated Appropriations Act, which became law at the end of 2020, issued a temporary change to company-sponsored meals and entertainment deductibility. From now to the end of 2022, purchases made for company-wide parties are 100% deductible. As long as you include all your non-highly compensated employees, you’ll be good to go.
Like company-wide holiday parties, treating 50% or more of your staff to a meal is 100% deductible under the Consolidated Appropriations Act as long as you buy the food from a restaurant. If it’s an after-hours event and fewer than half of your staff show up, the meal is still 50% deductible.
Perhaps a dinner event isn’t logical for your company. Providing a meal to those working overtime is another 100% deductible way to give back during the end-of-year rush.
Some restaurants offer inexpensive holiday dinner bundles of several side dishes and a whole turkey or ham. Since meals purchased from restaurants are tax-deductible, you could buy some dinner bundles for your remote team and send them to their homes.
Promote goodwill among your team members by scheduling fun team-building activities on relaxed days or after work.
Here are some festive ideas to get you started:
Because your contributions to these events are minimal, the IRS would consider them to be de minimis fringe benefits, meaning you don’t have to pay taxes on them. Plus, your team will get a valuable opportunity to learn more about each other and loosen up a little.
Providing holiday-specific benefits can help boost morale among your team members and increase retention rates. Investing in your employees is a great way to show your appreciation for their hard work.
For example, you could offer new opportunities for personal development, like tickets to attend a conference or listen to a prominent speaker in your industry. Or you could provide improved or updated work tools to your employees who regularly work from home. Generally, as long as they pertain to work, fringe benefits are de minimis and not taxable.
If the nature of your work allows for it, you could offer more work-from-home or flex scheduling options around the holidays. This way, employees can relax a little more during the holiday season while they wrap up the year’s final tasks.
Temporary flexible scheduling is advantageous because your payroll tax obligations will not change. As long as things return to normal after the holiday season is over, you will not have to do anything different regarding your employees’ paychecks. They will receive the correct pay for the hours they worked, and you will keep your regular routine.
Make sure your employees know this is a holiday-specific perk. You should always be transparent about how similar bonuses will work moving forward, so your team knows what to expect.
As long as your line of work allows it, you could provide your employees with additional time off during the holiday season. How much time you award is up to you, but giving a little extra allows employees to spend more time with loved ones and return to the office feeling refreshed and ready for the new year.
Since payroll is still involved, paid time off still counts as taxable hours. Essentially, you will still need to withhold taxes for the time you award your employees regardless of their time off. However, since it is not supplemental income, the tax rate stays the same as it would be on an employee’s regular paycheck.
Additionally, unless you plan to make this bonus a regular occurrence, you should still ensure your employees know this is a one-time perk.
Navigating the murky waters of taxes for small businesses can create unnecessary frustration around the holidays. Enlisting the help of a tax attorney or accountant can save you valuable time and energy.
If you need help with your small business’s holiday taxes, schedule a free consultation with a Polston Tax representative or call us at 844-841-9857 today. We’ll help you untangle your tax obligations in time to celebrate.
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