Figuring out exactly how to calculate, distribute, and account for commodities such as holiday pay and bonuses can be an unadulterated nightmare, especially during the holidays when many small businesses are in their busy months. Without a tax analyst or a payroll specialist to handle the technical details, you’re sure to make a mistake somewhere.
Luckily, holiday pay and bonuses are fairly straightforward. Your decisions are actually pretty simple; they really just come down to whether or not you will have employees work on holidays and which tax system you will use to calculate bonus deductions. Here is a rundown on all the basics of handling holiday pay and bonuses.
Holiday Pay Basics
Though you don’t technically need to pay employees for holidays, you need to pay exempt workers for days when your organization is closed; this rationale is in line with FLSA guidelines regarding salary-based pay, which point out that an employer must compensate for any “absences occasioned by the employer” in order for the employees to remain exempt.
If your employees do end up working a holiday, you generally won’t have to compensate them at an abnormal rate (though some states, like Rhode Island, require time and a half). Be sure to refer to your hiring contract and state-specific laws in order to ensure fair treatment.
As a general rule, you should establish a consistent standard for your company’s holiday pay early on. The employee contract should reflect this standard.
The other component to keep in mind is collateral: though you may have your employees work on a holiday at a standard rate without legal repercussions in most cases, it’s considered bad practice to keep them working without an extra paid vacation day tacked onto their work schedule at some point. Therefore, for simplicity’s sake, if you can just use a paid holiday to cover your bases, you’ll have a much easier time figuring logistics out later.
Bonus Pay Basics
Bonus pay is “supplemental income,” which means the IRS taxes it independently of an employee’s primary check. Whether your employees are on salary or hourly pay, you will need to make sure that they are aware of the tax literature regarding their bonuses.
Your next challenge is how to pay your employees. Merits exist for both a separate check and normal pay: aggregate tax purposes will make a single check with the bonus factored in more convenient for both you and your employees, while a separate bonus is more conducive to a flat percentage charge common to supplemental income.
Though neither tax system is more or less appropriate than the other, aggregate tax filing results in less take-home pay since they may surpass their typical tax bracket. For example, the IRS will tax an employee making $2500 a month with a $5000 bonus as though they made $7500 that month. Since they are on salary, that $7500 will be computed annually, meaning that the IRS will charge a higher overall percentage—arguably unfairly.
The percentage method, on the other hand, is the benchmark the IRS uses for supplemental income. Instead of taxing a lump sum of income, the IRS simply charges a flat fee of 25 percent. This method is cleaner, involves less general hassle, and is, overall, more beneficial to your employees and, in the long run, your business.
It is worth noting that being able to deduct a uniform amount from each of your employees’ paychecks will save you time and energy at the end of the process. It won’t hurt that they receive the maximum take-home, as well.
End of the Year Bonuses and Tax Incentives
If you want to give your employees a bonus at the end of the year, you must first consider the time you will need to allow them to make changes to their W-4s. Often, temporarily changing the withheld amount on their W-4s allows employees to circumvent the accidental overtaxing of their bonuses due to skewed brackets, so many employees choose to make minute alterations before the end of December and change them back after January 1st.
Bonuses are often deductible, and your employees will certainly appreciated them. With these factors in mind, it is difficult to make a case against delivering a bonus to your staff if you can afford to. That being said, you will need to make it clear that your bonus is exactly that; you want your employees to feel appreciated, so give them bonuses where bonuses are due and let your employees know how they are contributing to the company growth.
The holiday season can bring complications to your financial system. If you struggle to stay on top of your payroll, don’t hesitate to call Abacus Payroll for a consultation at (856) 667-6225 today.
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