This article was updated on September 17, 2018.
It's always a good idea to give your hardworking employees holiday gifts and bonuses, but these financial offerings can unfortunately be tied to issues involving overtime, taxes and even conflicts of interest. If you're giving out bonuses and gifts this season, check out these guidelines:
Types of Bonuses
There are generally two types of bonuses: discretionary and nondiscretionary. Most organizations that provide bonuses offer nondiscretionary ones, which are announced well in advance as an encouragement for greater work efficiency or for retention purposes. Discretionary bonuses are not announced in advance, nor are they tied to meeting certain criteria.
When calculating overtime under the Fair Labor Standards Act (FLSA), employers need to remember that nonexempt employees must receive overtime for all hours worked over 40 in a workweek, and nondiscretionary bonuses must generally be included in a nonexempt employee's regular rate of pay. FLSA overtime rules status: As of August 31, 2017, a federal judge permanently blocked the Final Rule. Visit the ADP® FLSA page for details and resources.
What If a Nondiscretionary Bonus Is Earned Over a Single Workweek?
In this scenario, you should add the bonus to the employee's regular earnings for that week when determining his or her regular rate of pay for purposes of compensating employees for overtime work.
What If the Bonus Is Earned Over a Series of Workweeks?
In this case, you should include the bonus in the regular rate of pay in all overtime weeks covered by the bonus. For example, if an employee receives a $2,600 annual bonus, you should divide the amount by 52 weeks, resulting in a weekly amount of $50. Then add the $50 to the employee's regular earnings in each workweek the employee worked overtime. Finally, you should calculate the regular rate of pay in each workweek that the employee worked overtime.
Taxes and Payroll
As bonuses are supplemental wages, they are subject to federal and state taxes. For federal tax purposes, bonuses up to $1 million are taxed at a flat rate of 25 percent.
Many types of bonuses — such as gift cards and gift certificates — are considered taxable by the IRS if they can be easily exchanged for cash. However, holiday turkeys or other items of nominal value are generally not considered income.
Conflicts of Interest
Vendors may give your employees gifts, and employees may want to do the same for their clients. However, as gifts can raise concerns about conflicts of interest, you should prepare written guidelines about giving and receiving gifts. Set a nominal value on acceptable gifts. Also, if you work with foreign officials, you may be subject to anti-bribery laws. Make sure your employees know your policies and are trained to comply.
1. Review Your Budget
Determine if your business has the necessary funds to pay holiday bonuses and how much you can afford to put toward these gifts. Remember that bonuses don't have to be extravagant: Gift cards or an extra paid day off are great ways to show appreciation.
2. Set Clear Criteria to Determine Bonus Eligibility
You may want to determine bonus eligibility using certain criteria, for example, seniority or performance throughout the year. Just be sure to communicate bonus criteria and apply it consistently.
3. Manage Employee Expectations
Make sure you communicate to employees that a holiday bonus is awarded at the company's discretion and is not an entitlement.
Holiday gifts and bonuses are a powerful way for you to show how much you appreciate your employees and the hard work they put in throughout the year. Following these guidelines can help you stay compliant and avoid any conflicts of interest as you show your appreciation.