Many companies provide a holiday/Christmas bonus or year-end bonus to some or all employees in December. There are several important rules about bonuses that every employer needs to know. When planning your bonus plan, and calculating a budget, consider the following important reminders:
- Bonuses that are discretionary (meaning, the company decided the amount and timing without making previous promises to employees about the specifics), are excludable from non-exempt/hourly employee’s calculation of overtime rate. Written bonuses programs that provide a roadmap for employees to know exactly how to earn the bonus are not considered discretionary. The Department of Labor rule about non-discretionary bonuses (and how to properly calculate OT if a bonus is paid) can be reviewed here. DOL also states that gifts and payments in the nature of gifts on special occasions may be excluded from overtime calculation.
- If the company is paying different bonuses amounts to employees, the company should have non-discriminatory reasons for the decision. The bonus may be based on performance, employee classification, length of service, location or department – or other non-discriminatory bases. If someone complains, you have your support.
- Are your company’s bonus or gift excluded from federal and state taxes? In most cases, the answer from the IRS is “no.” IRS publication 5137 states that de minimis gifts may be excluded from taxation, including holiday gifts. An essential element of a de minimis benefit is that it is occasional (or unusual) in frequency and the value is not too large. It cannot be disguised compensation. If a holiday bonus is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
- What about gift certificates? The IRS says that cash or cash equivalent items provided by an employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable. A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.
Check out the DOL and IRS rules to make sure your holiday good tidings do not become a headache.
Consultstu LLC provides fractional HR services to small/mid businesses to lower operational costs, improve business processes and comply with workplace regulations. We deliver customized HR and risk management solutions that provide protection from expensive mistakes and strategies to improve workplace results. Call us at 727-350-0370 or visit http://www.consultstu.com