Christmas Bonus vs. Year-End Bonus, Is there a taxable difference?

Some small businesses give personal gifts of food or gift cards, while others mimic larger businesses who customarily give the equivalent of one or two weeks salary to their employees at this time of year. According to the IRS, bonuses of money and of gift cards (considered a monetary equivalent) are considered taxable income and must be reported. They should be included on your W-2. If your employer has neglected to account for them – you can ask for a corrected W-2 before you file your taxes. Federal and state income taxes must be withheld from them, including FICA (Social Security and Medicare.) The tie in to the holiday giving season makes the Christmas or holiday bonus a gesture of thoughtfulness, showing employees they are valued.

Are non-monetary gifts taxable?

Fortunately, other types of gifts of the non-monetary variety (like a ham, a turkey or a gift of food) are considered “de minimus” and may be exempt from being declared on your income tax form. If you are an employer, make sure your employees know whether they are being given a discretionary holiday bonus, a de minimus gift or a year-end award.

Year-end bonuses are on the rise

Year-end bonuses carry a slightly different message to employees. Many or all are performance based. But they can be different in that some are tied into individual performance and others tied into the annual profitability of a company. Therefore they are variable in size and subjectively awarded. Accounting Principals, a leading accounting and staffing agency with branches throughout the US, reports that the average company bonus for companies with over 500 employees was a little over $1000 in 2016. The same firm reported that about 75% of companies planned to give out bonuses.

Are bonuses wages?

If you are in receipt of a lump sum of money – how is it accounted for in your taxes? The government still considers this wages. However the government may categorize these as supplemental wages. They are similar to vacation pay, commissions, overtime and severance pay. If you have questions about the amount of money your employer put aside for taxes, this Christmas bonus FAQ may help you understand it better.

Perhaps you suspect or know for a fact that bonus money is coming, maybe you were informed by Human Resources, negotiated for it as part of your hiring package or the employees around you mentioned it in passing. In any case, if you don’t have a purchase planned here are a few ideas for how you could invest that money into your future:

  • Examine all of your debt and place it in order of how much interest you are being charged. Pay some off.
  • Feather your nest with rainy day money.
  • And finally, think about increasing your contribution (or starting saving) for your retirement. There is no time like the beginning of a new year to assess your financial future. Do this and you may receive the added benefit of a tax deduction. More here