When to Give Your Employees a Year-End Bonus

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Ronald Sierra
Ronald Sierra
In Incentive Compensation
Ron Sierra is a Content Writer at Xactly. He earned a literature degree from UCSC and specializes in creating value-driven content for professionals in everything from construction to tech to sales & finance.

With the new year around the corner, you may be looking to award employees with a year-end bonus—compensation above an employee’s specified base salary.

Traditionally, American companies would give an annual year-end bonus to all employees. Today, an annual year-end bonus is not a guaranteed offering in all businesses. Yet, since the holidays are a frenzied and high-spending time for many employees year-end bonuses can be powerful and appreciated form of additional compensation. But as a manager, you have a few things to consider before doling out incentives.

Why Give Out a Year-End Bonus?

No one will ever complain about receiving a year-end bonus. This can be a way for your company to say thank you to your employees or your team. A holiday bonus can also improve employee productivity, loyalty, motivation, and morale.

To be more cost-effective, you might even tie the amount of the bonus to performance. If your company has a policy of handing out year-end bonuses for employees, then it is important to honor that practice. Many employees depend on year-end bonuses to get through the holidays.

Still, it is critical to clearly define the conditions to qualify for a bonus, as employees may feel deep disappointment if they don’t receive a bonus. If you promise a bonus, you are ethically (and maybe even legally) liable to pay the holiday bonus.

How Much Do You Spend?

Many employers have trouble figuring out how and when to distribute holiday bonuses. The easiest method is to give every employee the same amount. Yet, the top performers and high-level employees may feel some resentment over receiving the same amount as a new hire.

A more equitable practice might be to set up bonus amounts by tier.

As a result, each employee at the same tier receives the same amount. To illustrate, managers might receive a larger bonus than their staff.

If the bonuses are limited this year, you can add paid time off on a pre-determined day. This can help employees feel less disappointed if this year’s year-end bonus isn’t as high as it was the year before.

Make Sure Everyone Gets a Bonus

If you do give out year-end bonuses, make sure everyone that has put in the work gets a bonus no matter what. Personal preferences should not interfere with giving. You might not like an employee’s personality, but if they are honest and work hard—that is all that matters.

While different tiers may get different amounts and/or types, everyone needs to get something. If you are planning to segment the bonuses by tiers, make sure these are clearly defined. You don’t want to cause chaos and confusion over bonuses right before the holidays.

In addition, you don’t want it to appear as if certain individuals are getting better holiday bonuses just because you like them more.

Base Bonuses on Company Earnings

In general, people understand that a company can afford to dole out better bonuses when earnings are higher. So, the value may change on a yearly basis. One year, you can afford to give out an average of $1,000 per employee. Another year, earnings might be down so, the year-end bonus might decrease to $600.

This shouldn’t be an issue as long as you let your employees know what to expect. Furthermore, employees should already have an idea of how well the company is doing towards the end of the year.

Still, you want to let them know what to expect. In a perfect world, you do this by November.

Year-End Bonus Percentages

There isn’t one rate for holiday bonuses. It really depends on what your company can afford and how much you feel your employees deserve. To keep things simple, you can calculate the bonus as .5%-10% of their annual salary. On the other hand, you can set it up as tiered giving and based on company performance, as mentioned earlier.

Bonuses Based on Longevity

The longer an employee stays with the company, the more they might think they deserve and for good reason. These are employees who have probably had other offers but chose to stay with your company. So, some businesses offer bonus rates based on longevity.

For example, after five years of continuous employment, you might pay a certain amount. Then, that amount would go up after 10 years of continuous employment. You might give $700 to each employee with five years of service and $1,400 to each employee with 10 years. In contrast, you might also use a percentage system.

So, an employee with five years of service would get 3% of their pay as a bonus and a person with 10 years would get 6%. With whatever system you choose, make sure it is clearly defined and consistent.

Prepare for next year with comprehensive resources that will help you design a competitive comp plan.

Non-Cash Bonuses

Other options for holiday bonuses include paid time off, unpaid time off, flexible hours, gifts and holiday lunches or dinners. For example, a manager might take his team to a nice Christmas lunch as a bonus. There might also be a nice holiday party for everyone and a plus one.

For example, if you can’t afford to pay 25 employees $100 each, you might look at spending $600 on an amazing holiday office party. You could even rent out a local theater for a screening of a classic holiday movie with free drinks and concessions.

In other words, if you can’t afford individual bonuses, give your employees a special holiday party or treat.

The Best Time for Bonuses

It’s best to start planning your bonuses in the summer. The holidays are a rushed time of year, and you want the rollout to go as smoothly as possible. This is especially true if you have over 20 employees.

Since Christmas is a federal holiday, most employees will be off several days before and/or after. The most appropriate time to give a bonus is the first week of December. This way, employees are at work and able to participate. Also, they won’t slack off during November because they have more money in their wallets.

Plus, if you give monetary bonuses, it means that there is still enough time in the month to use those bonuses on Christmas shopping and meals. If it is a holiday party, then it means people are still at the office and are able to attend. So, roll out your bonuses the first week of December.

Tax Implications

Bonuses can be listed as a business expense and can be tax deductible—depending on the business type. C corporations can deduct bonuses for shareholders who have a 50 percent or higher ownership when the bonus was paid. S corporations can also deduct bonuses for shareholders who own shares when the bonuses are paid.

Unfortunately, bonuses are not deductible expenses for partnerships, sole proprietorships, and limited liability companies. Moreover, bonuses are taxable income to employees. As a result, you must withhold FICA taxes, social security, Medicare, and federal and state income taxes.

Final Thoughts

Just like your company, many employees have a budget and factor their year-end bonus as part of their yearly earnings. This means that they are also budgeting their holiday spending around their bonuses.

If the amount is going to change, it is best to let them know as early as possible. Also, bonuses should be consistent and unbiased—you shouldn’t give more to an employee just because you like them more than others.

Not to mention, tiered or longevity bonuses are more fair because they reward people based on tenure and position. And, bonuses don’t have to be cash. End of year rewards can be time off, a nice holiday party, gifts, and more.

If the bonuses will be of a lower amount than last year, let your employees know by November—usually, they will have an idea if the company isn’t doing as well as the previous years. And, don’t forget the tax implications.

What’s the most thoughtful holiday bonus your company has ever given? How do you make sure year-end bonuses are fair?


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When to Give Your Employees a Year-End Bonus