Employee bonus and gift Basics
Client Education: Gift Expenses (updated 2022)
The amount and method you choose to pay out employee bonuses or gifts will determine if you receive a tax deduction and how it is taxed on the employees' end.
All payments* your business makes to its employees are considered taxable income to them in order for it to be a tax deduction for your business. If you don't run it through payroll, it might trigger the employee receiving a 1099 and picking up more tax burden than you anticipated, or your business not being able to take the value of it as a tax deduction.
Run employee bonuses & gifts through payroll - Bonuses paid to employees need to be included on their W-2 for it to be properly reported as income to them and for your business to take the tax deduction. You can either increase the bonus to cover the payroll taxes, or you can let the taxes reduce the bonus.
If I am processing your payroll, provide me a bonus list by employee - List each employee, the bonus you want to pay out, and if you want to cover the taxes.
Example: You want to pay out $200 per employee as a 'thank-you' for their hard work
Option 1: The bonus as the gross check - The employee
receives only $179.30 because taxes are withheld from
the $200 bonus you gave them.
Option 2: The bonus as the net check - The employee
receives a check for $200. You are grossing up the
actual bonus to $223.08, so they get the full intended
bonus amount. This means you are effectively covering
the additional tax.
You may gift at the value of $25 per individual per year and not trigger any tax. Gift cards are a common delivery method. You get the tax deduction, and your recipient can receive the gift tax-free. Keep all receipts and a log of whom you gave to so you don't exceed the $25/per person/year limit.
Pro tip: Opt for live handwritten checks and not a direct deposit if you want something to hand deliver or put in a holiday card for a more thoughtful delivery.
*Reimbursement checks to your employees and gifts under $25 value are not included in their taxable income.
This is a simplified overview of gift expenses and bonus payroll for tax purposes. All facts and circumstances have not been expressed.