As we approach the end of the year, many employers are preoccupied with planning holiday parties and managing employees’ requests for time off. The holidays are an exciting busy time, but one thing that employers should not forget to think about is the year end bonus.
Employers are not required or necessarily expected to give out a year end bonus to all employees, but doing so is a good way to reward employees for all that they have accomplished throughout the year. Giving out a year end bonus can help to boost employee morale, loyalty, and productivity.
Still, employers that choose to give out a year end bonus should keep a few things in mind.
Deciding How Much to Give, and To Whom
While employers are not required to give out a yearly bonus, those that do should be as fair as possible. If bonuses are being given out, all employees should be given the same type of bonus. The method of determining the bonus amount is up to the employer, but it should be applied consistently. For example, all employees could receive the same amount, or they could receive the same percentage of their pay. Employers could also set up a tier system, where employees in each tier receive the same amount. With this method, managers would be on a tier higher than their subordinates and receive a slightly higher bonus. Some employers choose to tie the bonus amount to the company’s performance that year. Whichever method an employer chooses, they should be sure that all employees understand how the bonus amount has been determined.
Discretionary vs. Non-Discretionary Bonuses
Employers must know the difference between a discretionary bonus and a non-discretionary bonus. A discretionary bonus is a bonus that is given at the sole discretion of the employer, and not disclosed in advance. It is not part of the employee’s contract and thus the employee should not expect to receive it. A non-discretionary bonus is a bonus that has been promised to the employees in advance, whether it is implied or stated formally. For non-exempt employees, a non-discretionary bonus must be factored into the overtime pay calculations for the time period in which the bonus is given. Employers must be careful that they do not create an expectation of a bonus, because that makes the bonus non-discretionary. Even making a vague comment about a potential holiday bonus could be considered a promise of a bonus, presenting legal implications if the employer does not end up giving out that bonus or does not factor it correctly into overtime pay.
Giving out a bonus is not as simple as handing employees cash. Employers choosing to give a bonus must take steps to ensure that they are remaining compliant. Compensation that goes above an employee’s standard salary or hourly rates is still considered taxable compensation. Bonuses are treated as supplemental wages, and employers can either lump the bonus into the employee’s usual pay and go through the normal process to figure out withholding, or they can withhold a flat 22%. For more information on the rules for payroll taxes on bonuses, visit page 19 of IRS Publication 15.
When to Give
While bonuses are typically given out at the end of the year, employers should start planning for them in the summertime. The end of the year tends to be a very busy time for people both personally and professionally, so it is ideal to have the bonus plan squared away and ready to be rolled out at the end of the year. The best time to announce and distribute bonuses is in early December. Giving it too early could result in employees mentally checking out and performing less, since they already have the bonus. But waiting too long to give out the bonus could prevent employees from using the money on holiday shopping, and it could get more difficult later in the month as employees start to take vacation time and travel for the holidays.
In conclusion, giving out a year end bonus is a great way for employers to show their appreciation for employees and all that they have accomplished throughout the year. That being said, any employer choosing to give out a year end bonus must ensure that they are doing so in a fair way, and remaining compliant. Employers should educate themselves on compliance issues related to bonuses, and put careful thought and consideration into how they will go about distributing a year end bonus.