Thinking About Handing Out Year-End Bonuses?

Here are some tips for making them meaningful.

The Kansas City Royals will enjoy a substantial bonus worth more than $370,000 for each player, thanks to the team’s recent World Series championship. Your business’s bonus budget is probably smaller than the Royals’, but you can still reward employees who’ve knocked it out of the park at your business this past year.

Here are a few things to think about before you starting handing out bonuses:

  • Are monetary bonuses still relevant for your business? If it’s a long-standing tradition that you hand out hefty checks at the end of the year, you’ve set the expectation to continue the practice. If you decide to stop doling out cash, think about the impact on your employees who may have already earmarked the money for a specific purpose (like Clark Griswold making a deposit on a swimming pool only to find out his boss cut holiday bonuses).
  • Are year-end bonuses still an effective motivator? Usually, bonuses are handed out as rewards for top performers. Some may view a bonus as an entitlement and don’t connect performance with the reward.
  • If you decide to give bonuses, you need to understand what bonuses really mean from a tax perspective. Bonuses are treated like any other pay and are subject to income tax withholding, as well as the Federal Insurance Contributions Act (FICA). Treat it as part of regular compensation and figure withholding correctly. You may also choose to withhold a flat amount of income on the bonus (flat rate is 25 percent). Or you can combine the regular pay with the bonus amount to calculate withholding taxes, but only take the additional taxes from the bonus check. Remember, the employee will still owe taxes based on their individual tax situation.

Finally, let your employees know why they’re receiving a bonus. Connecting their performance with your company’s success will make for a great team effort.