January 2022 Employee Bonuses

WHAT EMPLOYER SHOULD KNOW ABOUT HOLIDAY BONUSES

Employees must report bonuses as taxable income.

Employers may deduct bonuses under certain circumstances. The IRS permits bonuses to be deducted by the employer if the bonus is an ordinary and necessary business expense. If a deduction is made, keep in mind that any bonus must be reasonable.

Gift cards are taxable as income unless de minimis (trivial/minor).

Identify fair bonus practices. Like all compensation, bonuses are subject to equal pay and anti-discrimination laws. To maintain fairness and guard against discrimination, bonuses should be based on objective, identified factors (such as earnings). In addition to maintaining an appearance of fairness, an employer must disclose these factors well in advance of year’s end. At the same time, such disclosure will work to motivate employees to achieve benchmarks the employer considers valuable.

The bonus must be gift, or in the nature of a gift. If the bonus is in any way measured by or dependent upon the employee’s hours worked, production or efficiency, it is not a gift. A bonus will still be considered a gift even if the amounts paid to different employees or groups of employees are dependent on their base compensation and/or length of service.

The bonus must not be “so substantial” that employees consider it part of the wages for which they work, as opposed to a gift.

The bonus cannot be paid pursuant to contract or any other kind of agreement. If it is, the employee has a legal right to the payment and it’s not in the nature of a gift.