An Employer’s Guide to Seasonal Payroll Bonuses

01 Dec An Employer’s Guide to Seasonal Payroll Bonuses

Seasonal payroll bonuses bring joy to many employers and feelings of anxiety to others. Most of us relish being able to reward our team’s outstanding employees. Seasonal bonuses are a minefield for some employers, full of complicated employee relationships, compensation confusion, and not knowing when, how much, or how to pay bonuses correctly. For some businesses impacted by COVID-19, there isn’t enough cash left over after a challenging year to pay out bonuses. So, what is a boss to do?  MORE>>>

Giving Bonuses – To Do or Not to Do

Simply deciding if you should give bonuses, or not, can be a hard choice.  First, and most important, is knowing if you can afford to give bonuses and if so how much can you afford to spend.  If you aren’t sure you should review your financial position.  Meet with your financial advisors like your accounting team or your management team and get an idea of where you stand.   It can be hard to have to scale back.  Being fiscally responsible can keep your business alive to fight another day.  If you can bonus then next you need to decide who gets a bonus.

Who Gets a Bonus

First, review your compensation policies and adhere to any compensation plans that are contractually obligated.  Merit bonuses are often purely at the discretion of the business owner.  However, this doesn’t mean you can simply bonus your favorites.  Consider their role, length of employment, part-time v full-time, and use it as a filter.  You can also consider things like the total volume of sales or special projects or accomplishments.  Be sure to apply whatever metic you develop fairly.  Bonus points if you make sure you check yourself and your process for bias.

How Much to Bonus

Bonuses are still part of your compensation structure and are subject to the same rules governing compensation packages. We recommend developing a formula that you apply evenly to employees. For example, you could give a bonus to all of the full-time workers with you for at least six months, calculating the amount based on their average week’s wage. In contrast, if you give Mike a $2000 bonus because he works harder than Suzy, who has to go home every day at 5 to pick up her kids, you could find yourself in some hot water. Creating a metric by which you bonus people will help to prevent bias from sneaking in. Finding the right metric for your team can take a little work but is well worth it. Old school etiquette says a fair bonus is equal to 1 week’s wages. This varies widely based on industry, type of worker, and your budget.

How do you pay out a bonus?

Bonuses are always taxable compensation so be sure to pay them via your payroll.  Some other kinds of employee gifts of value may also be subject to taxation so be sure to check with your tax advisor regarding how these rules apply to your business and your state.

Gross Bonuses

Gross bonuses mean you pay the bonus at $X and the taxes come out AFTER.  If you were to bonus $1000 the net pay to the employee will likely be something like $750.  These amounts are almost always not a round number and lots of people don’t like it when the employee gets a bonus for $751.26. The cost to the employer here is $1000 plus any applicable employer taxes. The alternative method is a net bonus.

Net Bonuses

A net bonus presents a little more nicely.  The amount paid to the employee can be a nice round number.  For example, if the employer wants to give a $100 bonus the payroll company will “gross-up” the pay.  The employer will actually bonus something in the neighborhood of  $130 so that the net pay after taxes comes to something like $100 even.

Cash, Check, or Direct Deposit?

Cash bonuses are always nice. You still need to report these via payroll, so be sure your employees are taxed. Direct deposit is convenient and easy. However, suppose your workforce doesn’t often check their bank accounts or review their paystubs. In that case, a bonus could go completely overlooks and go unacknowledged! Make your employees aware of the bonus if you choose to use direct deposit.

Jelly of the Month Club

Then there are the years when you just can’t scrape together the resources to make a bonus happen.  2020 certainly will be that year for many employers.  If bonuses have historically been part of your compensation plan, it is best to alert your team early.  The Clark Griswald moment in “National Lampoon’s Christmas Vacation” where Clark writes the big check for the pool only to find there is no bonus, and only a Jelly-of-the-Month subscription, could become all too real too fast. Being upfront now will prevent awkward conversations later.

The big takeaways here should be:

• Bonuses are compensation.  Always run through payroll as taxable earnings.
• Root out bias and favoritism in your bonus systems.
• If bonuses aren’t in the cards this year be sure to let people know.