Holiday Bonus for Nonprofit Employees
The employees of your nonprofit organization have worked hard all year for way less than they’re worth. Wouldn’t it be nice to give each one a holiday bonus as a thank you?
Each holiday season we see nonprofit organizations pay cash bonuses to employees outside the normal payroll process. We need to address this practice up front, though we hate to sound like the Grinch!
The IRS considers a cash bonus of any amount to be taxable wages. Therefore be sure to run bonus checks through payroll. We give you an example below for a $100 net bonus check. Better yet, we give you more good ideas in this post besides a cash bonus!
Income Tax Withholding on Bonuses
The income tax withholding requirements on bonuses can be confusing. You can either withhold a flat 22% for income taxes or combine the bonus with other regular wages and calculate income tax withholding on the combined amount. See IRS Publication 15 Employer’s Tax Guide, Item #7 on Supplemental Wages under Main Content for details.
Bonus wages, of course, are also subject to the usual Social Security and Medicare taxes.
Gross Up to a Net Bonus
If you want to give an employee a bonus check for $100, you could gross up the paycheck so that after the required tax withholdings the net check is $100. The check would look like this:
Adding the employer match for Social Security and Medicare to gross wages results in a total cost to the organization $153.01.
“We’ll do gift certificates, then!” you say.
Not so fast; the IRS also considers gift certificates to be wages if they are redeemable for general merchandise. A gift certificate for a “specific item of personal property that is minimal in value, provided infrequently and is administratively impractical to account for” may be excludable from wages depending on the circumstances.
Let’s unpack those requirements.
Minimal Value: The IRS states on their web site for De Minimis Fringe Benefits, “The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.” Therefore items with a value of $100 or less could be considered minimal in value.
Provided infrequently: Giving a gift certificate once per year at the holidays is infrequent.
Administratively impractical: We think any gift certificate would be “administratively impractical to account for” because it goes outside the normal medium of cash. You would need to manually gross up employees’ paychecks for the value of the gift certificates then deduct that same value as a non-tax deductible amount, simlar to repayment of an employee cash advance. Not an administratively convenient process!
Based on the above information and reasoning, a gift certificate valued up to $100 for a specific item of personal property that is given only once per year at the holidays is probably OK to exclude from employee wages.
What can you give that’s not considered wages?
Does the IRS allow employers to give anything to employees that is excluded from wages??? Fortunately the answer is yes! Here are a few ideas from the U.S. Department of the Treasury’s regulations:
- Occasional theater or sporting event tickets
- Holiday gifts of property (not cash) with a low fair market value
- Occasional cocktail parties, group meals or picnics for employees and their guests
- Coffee, doughnuts and soft drinks
You may also send employees flowers, fruit, books or similar gifts under special circumstances such as illness or outstanding performance.
IRS Publication 535 also states that employees can exclude the value of an employer gift of a “turkey, ham or other item of nominal value” from income.
Holiday Gift Ideas
Based on IRS guidance and ideas we’ve seen or heard of at other nonprofits, here are a few suggestions for how you can reward employees during the holidays:
- Dismiss employees early on a Friday. Everyone could use more time around the holidays!
- Give a ham, turkey, or gift certificate redeemable for a ham or turkey (not general merchandise).
- Give a nominal gift such as an annual year planner, umbrella, or insulated lunch tote. Employees may be sensitive about spending organization dollars on personal gifts, so perhaps the board would be willing to make a special donation to cover a staff appreciation gift.
- Hold a holiday party. The party could be during office hours and include a pot luck, a holiday art activity, a white elephant gift exchange, or a recycled gift exchange (for items of actual value that are no longer needed).
- Make an improvement to an employee common area such as a new microwave or fridge. Possibly you could secure a donated item.
- Adopt a family for the holidays. Collect food and gifts from the staff, and hold a gift wrapping party complete with hot chocolate and cookies.
One organization we work with has a photographer come in each year to do family portraits. The first 8 X 10 picture is free. The photographer charges for additional photos with a percentage going back to the organization. An activity like this could be a nice addition to a holiday party for staff and their families. Perhaps combine it with an activity to make personalized Christmas cards.
Of course, many of these ideas are not gifts so much as ways to build a workplace culture that makes employees feel appreciated. A blog post on this topic underscores the importance of valuing employees and gives suggestions.
What holiday traditions do you have at your organization? How do you make your employees and coworkers feel valued? Please share your ideas!