About 35 percent of small-business owners gave year-end bonuses last year, the U.S. Small Business Administration reports. Bonuses range in size depending upon the industry and company. They can be a way to retain employees and show gratitude for them during the holiday season, but they also have tax implications, so it’s important to take that into account.
SBA recommends business owners create a fair approach to how bonuses are paid. Bonuses need to be accounted for in the business’ budget, and all bonuses or gifts need to take into consideration the business’ cash flow. Here are some suggestions:
1. Be fair and specific: Include bonus information in employee agreements or policy manuals, and provide information about when (this year or next) and how (based on performance, a flat amount or years of employment) the bonuses will be paid. Choose the same type of bonus for all employees in order to avoid grumbling, or if the bonus is tied to performance, explain specifically how this works.
2. Give only what you can: If a business owner can’t afford bonuses, then they shouldn’t dig themselves into a financial hole in order to do so. Not every business will give its employees a bonus. A business owner can still show appreciation for his or her employees by giving them time off, closing the office, giving a raise for the next year, hosting an appreciation dinner, and other ways that don’t involve a lump-sum payment.
3. Remember payroll and Medicare taxes: Bonuses are still taxable income and will receive the same tax withholdings. Some bonuses, depending upon the amount, will need additional withholdings for Medicare. Refer to the Department of Revenue (www.irs.gov) for more specific information.
4. Decide when to declare and make payment: Depending upon its method of fiscal operation, a company may be able to declare the year-end bonuses by Dec. 31 for its current year taxes but not pay the bonuses until March 15 of the following year. Check with the IRS or a financial adviser to determine where you fit.
5. Provide employees with another option: Instead of cash, a business owner could use the money to fund a qualified retirement plan such as a profit-sharing plan. There are restrictions for how much can be added, and contributions cannot favor the owner or managers. Business owners also could give their employees stock in their corporation. A financial adviser could provide more information about either of these options. SBA suggests business owners also encourage their employees to discuss options with their tax advisers, as well.
Once a business owner decides whether he or she can afford bonuses, a policy needs to be established to set guidelines for how a monetary bonus will be paid.
If the bonus is tied to performance, the employer will need to share expectations related to goals, deadlines or sales quotas. If the employee has received an award or a special degree, certificate, licensure or other designation, a year-end bonus is another way to reward that employee for the extra time and work and a job well done. ♦
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