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Holiday Bonus Guidelines: What Business Owners Should Know
May 10, 2022
Employee receiving his holiday bonus in office space with a smile

As the holidays arrive, business owners often consider these perennial questions: Should I give a holiday bonus to employees? If so, how much? Is doing so the same thing as giving a year-end bonus?

The answers aren't simple and can vary from one small business to another.

But here are some commonly accepted holiday bonus guidelines that can help you determine what's most appropriate for you and your employees.

Holiday and year-end bonuses are not necessarily the same. 

Generally speaking, these two types of bonuses carry different meanings for employees, and if you choose to combine them, they may be confused and could be dissatisfied by the results. Offering a holiday bonus is considered a gesture of gratitude from the employer, demonstrating appreciation for hard work and effort. A year-end bonus is usually more specifically performance-based, and it may be intended to boost motivation as the year rolls to an end (or to get employees revved up for the new year).

One way to avoid confusion is to extend the period of time between giving out a holiday bonus and a year-end bonus. "If you are doing a performance-based bonus, you can distribute in mid- to late January," writes business journalist Dan Cook. "By giving your holiday bonus around Thanksgiving, you create more space between the two."

Most experts in this field strongly advise that everyone in the business should receive a bonus of some kind; otherwise, it can feel demoralizing for those left out when bonus time rolls around and may even lead to claims of discrimination.

The bonus should reflect the employee’s position and tenure. 

While there's no strict determination of what constitutes the "right" bonus for employees, some guidelines are worth considering. According to Will Lipovsky at First Quarter Finance, "Employees who make more money, spend more time, have been with the company longest, or who perform integral or managerial tasks can probably receive a more generous bonus than employees who don't fall into these categories."

Let employees know ahead of time what's planned in terms of a bonus. 

This is an area where managing employee expectations is key. A year-end bonus is driven by individual performance, which can differ from one year to the next. Getting a bonus around the holidays is always welcome, but "a lesser one, or none at all, should never come as a just-before-Christmas surprise," Dan Cook notes.

Explore other types of holiday bonuses. 

Monetary rewards are, of course, always desirable--but non-monetary gifts are often welcome as well. These might include:

  • Paid time off, particularly around the stress-heavy holiday season
  • Company "swag," such as luxury branded apparel
  • Gift cards to a local movie theater, restaurant, fitness center, etc.

Remember that bonuses are taxable. 

Any monetary bonus must be reported on an employee's W-2 form as taxable income. (Note: Giving an hourly employee paid time off has the same tax consequences as if the employee was actually on the job during that time, meaning that the pay is reportable and taxable.) Some employers opt to pay both the holiday bonus amount and the tax amount, depending on arrangements made with employees.  Also, some bonuses are included when calculating an employee’s regular rate of pay for overtime purposes (typically, discretionary and holiday bonuses are not included, however nondiscretionary bonuses are).

The end of the year can represent a great opportunity to demonstrate--in a tangible, material fashion--just how much you appreciate all the work employees have done on behalf of the business. It also can be a key employee retention tool, since employees who feel appreciated are far more likely to stick around than those who don't.

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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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