It is the Friday before Christmas and it's a good bet that today employees around the US are getting their much-anticipated Christmas bonuses and/or attending a company Christmas party. Not to be a Grinch, but MoneyThumb wants to make sure accountants, business owners and employees realize that Christmas bonuses and Christmas gifts to employees are taxable. Read below for Rule of Thumb guidelines on taxable bonuses, gifts and information about Christmas parties when it comes to taxes.
What You Need to Know About Taxes on Christmas Bonuses and Gifts
Christmas bonus and holiday gifts are taxable
First of all, Christmas bonus and holiday gifts, though the amount varies from one company to another and may increase or decrease each year, are considered as part of an employee’s earnings. That being said, bonuses are also taxable and must be indicated in the employee’s W-2 (Wage and Tax Statement) form and will also be subjected to federal, state, and local government taxes. As an employer, the Christmas bonuses and holiday gifts that you are about to give to your employees must be indicated in your accounting records as wages. These are then fully deductible and are considered as valid tax deduction. Failure to report bonuses or logging them as another type of expenses in the company’s books and records will result into corresponding penalties from the Internal Revenue Service (IRS).
Types of Christmas bonus
Depending on the financial status of the company, business owners may consider any of the following options to give to their employees as a bonus:
- Cash – included in the employee’s paychecks
- Gift cards – a pre-loaded card that may be used to buy goods, dine at selected restaurant or avail of services at designated retailers or a group of accredited merchandisers.
- Gift certificates – good-as-cash and may be used to redeem a merchandise
Keep in mind that the bonuses specified above are subjected to applicable taxes because they are considered as additional compensation to the employee.
Christmas bonus under the 401(k) plan
There is an option for business owners to give out bonuses without incurring employer payroll taxes and still qualify for tax deduction on their business tax return. With the help of a certified public accountant, employers may release the bonus as part of the 401(k) profit sharing plan. The disadvantages of this non-taxable option is that the employees will not be able to receive the bonus as cash or check right away unless they withdraw funds from their plan and when they do, it will then be subjected to tax.
Holiday gifts and parties
Not all companies may afford to give bonuses to their employees but they need not fret for there are other means to spread good cheer. Small businesses and those that are just starting out in their respective industries may go for hosting a Christmas party at their office and/or distribute pre-made holiday baskets to its employees which they may take home to their loved ones. The monetary value of the party and the holiday baskets will no longer be subjected to payroll taxes as they are considered as de minimis or fringe benefits. Also, the total cost of the party is considered as deductible expenses for employers.