Bank of America’s Fall 2017 Small Business Owner Report reveals that 35% of small businesses plan to offer year-end bonuses. These bonuses are crucial for retaining good employees, especially in today’s competitive job market. The size of these bonuses can vary based on the industry, company policies, how they’re calculated (whether performance-based or a flat amount), and the timing of the payout (this year or next). Here are five things to understand about year-end bonuses:
1. Be Fair and Clear
Unless employees have contracts that specify bonuses, deciding to give a year-end bonus is up to the company. These holiday bonuses show the employer’s appreciation for good work. Companies want employees to feel good about their bonuses and avoid any feelings of unfairness. Consider:
– Giving everyone the same bonus, like a week’s wages.
– Tying bonuses to performance, ensuring employees know how it works.
– Paying bonuses based on how long an employee has been with the company (like a dollar amount for each year of service).
2. Pay What You Can Afford
Not all small businesses will give bonuses this year. However, with many companies experiencing higher profits, it might be easier to give bonuses compared to recent years. Since bonuses are optional, companies shouldn’t go into debt to be generous. But remember the real cost of giving bonuses, including:
– Employer’s payroll taxes. Depending on total annual payments, the employer’s share of FICA can be 7.65% of the bonus (e.g., $765 on a $10,000 bonus).
– Employee benefits linked to compensation, like employer contributions to retirement plans.
3. Factor in Payroll Taxes
Bonuses count as taxable income subject to income tax withholding and FICA. They are considered supplemental wages, meaning employers can:
– Include bonuses with regular pay and calculate withholding as usual.
– Withhold at a flat 25% rate (this is the only allowed rate). For bonuses over $1 million (unlikely in small businesses), the flat rate is 39.6%.
The rules for payroll taxes on bonuses are detailed in IRS Publication 15.
4. Withholding for the Additional Medicare Tax
If a year-end bonus pushes an employee’s taxable compensation over $200,000, the employer must withhold the additional 0.9% Medicare tax on earned income. This must be done regardless of the employee’s marital status or whether they will ultimately owe this tax when filing their 2017 income tax return.
5. Declare Now, Pay Later?
Calendar-year companies using the accrual method of accounting can declare year-end bonuses by December 31 and pay them later. As long as these bonuses to non-owner employees are paid by March 15, 2018, they’re deductible on the 2017 return. However, bonuses to owner-employees follow different rules. For S corporations, bonuses are usually not deductible until they are paid and included in the owner’s income.
6. Conclusion
At this time of year, small business owners have a chance to show their appreciation and generosity. Besides bonuses, consider giving employees time off, closing the office for a day, increasing compensation for the coming year, or any other tangible or intangible benefits during the holiday season. A passionate “thank you” always goes a long way.
