If you're planning to give your employees bonuses or gifts this holiday season, keep in mind potential issues related to overtime, taxes, and conflicts of interest. Here are some guidelines to consider before distributing bonuses and gifts:
Types of Bonuses:
There are generally two types of bonuses: discretionary and nondiscretionary. Of employers that offer their employees bonuses, most provide nondiscretionary bonuses. In general, a nondiscretionary bonus is announced to employees in advance to encourage them to work more efficiently and/or to remain with the company. With this type of bonus, employees expect that if they meet certain criteria (such as attendance or productivity), they will get a bonus. By contrast, a discretionary bonus is not announced in advance and is not tied to meeting certain criteria.
Under the federal Fair Labor Standards Act (FLSA), non-exempt employees must receive one and a half times their regular rate of pay for all hours worked over 40 in a workweek ("overtime"). When calculating overtime, employers must include nondiscretionary bonuses in an employee's regular rate of pay.
Calculating Overtime with a Nondiscretionary Bonus:
- If the nondiscretionary bonus is earned over a single workweek, add the bonus to the employee's regular earnings for that workweek when determining the regular rate of pay for that week.
- If the bonus is earned over a series of workweeks, include the bonus in the regular rate of pay in all overtime weeks covered by the bonus period. If necessary, you may temporarily disregard the bonus in computing the regular hourly rate until you can assess the bonus amount. Once you determine the bonus amount, you must apportion it back over the workweeks of the period during which the employee earned the bonus.
Example: If an employee receives a $2,600 bonus for meeting certain annual goals, divide $2,600 by 52 weeks, which results in the weekly equivalent of $50. Add the $50 to the employee's regular earnings in each workweek the employee worked overtime to figure out the employee's regular rate of pay for that week and make catchup payments accordingly.
Tax and Payroll Implications:
Bonuses are generally considered supplemental wages and are subject to federal taxes as well as certain state taxes. For federal taxes, bonuses up to $1 million are typically taxed at a flat rate of 25 percent (39.6 percent for amounts over $1 million). Keep in mind that many types of bonuses are considered taxable by the IRS. For example, cash, a gift certificate, gift card, and similar items that can easily be exchanged for cash are typically considered taxable wages, regardless of the amount (see IRS Publication 15-B). However, if an employer gives a turkey, ham, or other item of nominal value for the holidays, it is generally not considered income.
Conflicts of Interest:
During the holidays, vendors may give employees gifts, or employees may want to give clients gifts. Because gifts can raise concerns about conflicts of interest, consider having written guidelines on giving and receiving gifts. For instance, many employers limit gifts to a nominal value and require employees to report gifts to the company. Additionally, if you work with foreign officials, for example, you may be subject to anti-bribery laws. Make sure your policy aligns and your employees are trained to comply.
For an effective holiday bonus program, consider these additional guidelines:
- Review your budget to determine whether a holiday bonus program is feasible, and how much you can devote to the program. Remember, bonuses do not need to be extravagant. Gift cards, an extra paid day off, or a holiday gift basket can demonstrate your appreciation to your employees.
- Establish criteria to determine bonus eligibility, such as seniority and performance throughout the year. Clearly define and communicate the criteria to your employees in writing, and apply all criteria consistently.
- Manage employee expectations. Avoid having employees view the holiday bonus as an entitlement. Communicate to employees that bonuses are awarded at the company's discretion and that the company may change the terms and conditions of the bonus program at any time, or choose to eliminate it entirely.
Holiday bonuses and gifts can boost employee morale. When developing a bonus program, keep in mind the various issues outlined above.