It's Bonus Time

Year-end is a great time to think about rewarding your staff for a job well done in 2014.  Here are a couple of quick tips to help make the most of bonuses while protecting your business and cash flow. 

1. Timing.  Would it be better to pay bonuses in this year to reduce 2014-year taxes or to wait until January of next year so they impact the 2015 tax year?  It’s something to consider before paying them out.  Consider discussing the timing with your tax accountant to do what’s best for your business. 

2. Forget the pretty holiday envelope.  It might be tempting to hand out envelopes of cash but it’s illegal in many states and makes documenting payments difficult.  Bonuses are part of payroll, so stick to the payroll system to generate your bonuses even if it’s boring, and you’ll stay out of trouble. If you do insist on cash payments, be sure to treat it as an advance on the next payroll subject to all the proper withholdings and taxes (see next paragraph).

3. Remember those deductions.  Bonuses are subject to payroll deductions just like any other payroll check, so please don’t forget that.  If you write a check for $1,000 to an employee, your company will be liable for taxes on the gross-up, and this can range from 20% to 30%.  So that $1,000 bonus just turned into $1,200 or $1,300, which is quite generous - but might not be what you really meant!

4. Incentivize to stick around.  Bonuses are a great motivator and can help keep employees from leaving, thereby reducing your turnover costs.  If possible, announce your bonus structure ahead of time so employees will have something to work toward and “earn.”

5. Additional costs of bonuses.  Bonuses may drive up costs such as workers compensation insurance, state and federal unemployment insurance, and any other costs that are related to gross wages.  Try to take all of that into consideration when issuing bonuses.  

6. Beyond money.   Money is a great motivator, but not everyone is motivated by that alone. Employers may want to provide non-cash bonuses to employees for extra special memories like a nice dinner for spouses, a company retreat, or some other type of entertainment in lieu of cash.  If you do, your tax accountant can help you get the transaction recorded properly. Or consider giving employees additional paid time off during the holiday season.  This can create good will toward you and give the staff something to remember and bring up the remainder of the year- “Remember when we went to ….”.  

Bonuses are fun for everyone, and we hope these tips will help make the most out of them in your business.