Holiday bonuses are often a welcome surprise for employees and a great way for employers to celebrate the season and show appreciation, but they come with some important tax rules to keep in mind —whether you’re on the giving or receiving end.
For Small Business Owners
Remember that the IRS sees bonuses as income and taxes need to be withheld. Most employers use a flat rate of 22% to cover federal taxes, plus Social Security and Medicare. You can deduct these bonuses as a business expense, but only if they are paid before December 31st. Keep good records to back up your deductions.
Timing matters. If you pay bonuses in January, they’ll count as 2024 income for you and your employees, which could impact your business’s tax planning. Thinking about giving gifts instead of cash? Tangible items like a fruit basket or holiday turkey are usually not taxed, but gift cards are considered taxable income.
For Employees
If you’re in the fortunate position to receive a holiday bonus, remember that it’s taxable income. This means your take-home amount will be smaller than you might expect, as taxes like federal income, Social Security, and Medicare are deducted.
Don’t stress about being pushed into a higher tax bracket. Bonuses don’t increase your overall tax rate, but they are added to your annual income. If you get a gift instead of cash, like a gift card, it’s also taxable and will show up on your W-2.
To make the most of your bonus, save your pay stub for tax time and consider setting some aside for expenses or savings.
Holiday bonuses can be a win-win when handled right. Need help figuring out what works best for your business or personal taxes? Contact David A. Santini, CPA, LLC for advice you can count on.