Payroll Tax Pitfalls: Employee Bonuses and Holiday Gifts
Veterinary employees work in a physically and emotionally exhausting environment. As end-of-year and the holidays approach, the chaos often worsens. Most practices host holiday parties and offer team members gifts to combat chronic overwhelm by showing appreciation. Gifts seem like a no-brainer, but how you present them to your employees can profoundly impact your payroll taxes.
Bonuses and gift cards are lovely gestures, but they also cause tax and bookkeeping headaches for practices the problem is that many people mistakenly believe—or simply want to believe—that cash bonuses and gift cards aren’t taxable. Unfortunately, the IRS feels differently.
Bonuses and gift cards as compensation
Cash bonuses, gift cards, or other monetary rewards don’t qualify as “gifts” when given to an employee. As an employer, any monies you offer to your team members are considered compensation, and compensation is subject to the full array of federal and state payroll taxes. Any cash or cash-equivalent gift is taxable, no matter how small the amount. This includes minor rewards like Starbucks or holiday gift cards.
Bonuses and holiday gifting the right way
Planning ahead is critical to avoid getting caught in a tax bind. If you plan to offer bonuses or gift cards, you must include the total amount on each team member’s paycheck to ensure the amount is subject to standard withholding. However, that doesn’t have to ruin the surprise! Some VetBooks practices like giving out bonuses during their holiday party and don’t want teams to see the amount included on their check. If you’re going to surprise them, hand out notes that list the bonus amount and when they can expect the extra in their accounts.
Why proper bonus handling matters
What if you fall victim to the urge to give cash? You and your employees will have to account for the unpaid payroll taxes later in a process we bookkeepers call “grossing up.” To fix your books, you’ll need to calculate the taxes owed on the already-given bonus and deduct that amount from future paychecks—not an ideal scenario for you or your employees.
Failing to handle taxable benefits appropriately can lead to trouble with the IRS, including audits and penalties. However, the practice isn’t the only entity that suffers—employees may end up under-withholding payroll taxes and receiving a hefty tax bill in April.
Key takeaways
To keep things simple, here are some best practices for handling holiday gifting and bonuses:
- Include all bonuses in payroll to ensure appropriate tax withholding.
- Communicate with your employees, so they know how bonuses will be handled.
- Run a separate payroll for bonuses if you want to surprise employees.
- Avoid cash gifts, but if you must, treat cash like an advance and include it when calculating payroll taxes.
- Give actual, tangible gifts. As long as you don’t give them regularly, physical gifts don’t count as compensation.
Rewarding employees for their hard work is important, but managing those rewards is equally crucial to business success. Start planning for the holidays now to determine if, when, and how you’ll distribute bonuses or other gifts without negatively impacting your tax burden or complicating work for your bookkeeping team.
For more tips on year-end procedures or assistance with your books, schedule a meeting with our VetBooks team.
