Small Business Taxes: Handling the Holiday Bonus

Posted on November 24, 2015

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Special Considerations for Small Business Taxes

small business taxesIt’s nearly the end of the year and you realize that your workers are a big part of your success. So to say thank you to your staff, you may plan to issue a holiday bonus, believing your employees can deduct it as a gift on their taxes and that it will reduce your taxable income. However, you may be unclear about how a holiday bonus can impact your taxes and end up with a higher amount due than you anticipated. Many business owners overestimate how much they can give employees in a holiday bonus, and don’t understand how bonuses can affect their small business taxes.

Consider the following areas when deciding whether to give a holiday bonus, and how much you will give:

Payroll taxes: Holiday gifts to employees are taxable bonuses that are reported on their W-2 forms. These payments are subject to payroll taxes for the employee, and for you. Talk with your accountant to find out what you’ll owe in taxes when you pay holiday bonuses, because the figure can vary by state and by things like your company’s workers’ compensation tax rate. It’s best to consult your accountant to be sure you’ve captured the total cost in taxes.

Nontaxable gifts: If you’re feeling a bit cash-strapped this holiday season, you can avoid paying taxes by giving a different type of gift, such as a great holiday party. You can distribute gifts like a ham or gift baskets without including the amount on the employee’s W-2. These gifts are considered simply an act of spreading goodwill among your staff.

However, if you decide to give out gift cards or cash, better talk with your accountant, first. While a ham or turkey is goodwill, a gift certificate or cash will be considered an addition to your staff’s salaries. Be ready to pay taxes on that gift certificate, but your accountant can help you figure out how much you’ll pay.

Federal withholding: When you withhold federal taxes from holiday bonus income, it can be done in different ways. A lower withholding amount gives the employee a heftier bonus check, but they may be frustrated when they are hit with a higher tax bill on their tax return. Ask your accountant to help you determine the best tax withholding and how it will impact your employee, as well as your small business taxes when it’s time to prepare your return in the spring.

A final word: When you give a bonus, you may be creating expectations for subsequent holidays. Make sure that, even if you are having a stellar year, you are giving a bonus that can be duplicated somewhat closely in the following years. Your employees may be budgeting their holiday shopping plans around that bonus after a year or two, so be careful not to set up unrealistic expectations.

When you are contemplating holiday bonuses for your staff, seek the expertise of Bert Doerhoff, CPA. At AcccuBiz, small business owners can find the guidance and advice they need to make wise financial decisions.

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Posted in: Small Business