There’s a long-standing tradition of businesses giving Christmas bonuses to loyal employees. Each year, employees eagerly await these bonuses, trying to guess how much they will be, when they’ll be handed out and fantasizing about how they’ll spend it. Whether it’s a large corporation, a medium-sized company or a small business, at this point, it’s almost expected that Christmas bonuses will be given. It’s so commonplace that movies have been made around the premise, the most well-known being “National Lampoon’s Christmas Vacation,” with Chevy Chase and Randy Quaid. But there’s a downside to giving Christmas bonuses, too. Here are the pros and cons to help you decide how to handle the holidays this year.
Pro: Increases Employee Morale
Times have been tough for many people in the past year. The rising costs of housing, food and energy have forced people to tighten their belts more than in recent memory. Christmas bonuses serve to alleviate some of the morale decline that can come from barely having enough money to last through to the next payday. The bonus can also serve to increase employee morale in the sense that employees will feel confident about the health of the business. The assumption will be that if there’s enough money in the coffers to hand out checks, there’s enough business coming in to support the staff for the foreseeable future.
Con: Bonus Money May go Toward Bills
At the same time, giving Christmas bonuses in order to take off some of the burden for employees who find it hard to make ends meet is less than ideal. In circumstances like these, employees might end up using bonus money to pay bills or even prevent the power from being cut off due to overdue energy accounts. While this is a short term fix, it doesn’t solve the underlying problem; nor does it serve your purpose of trying to pad your employees’ pockets during the holiday season.
Pro: Performance-based Bonuses Can be Motivating
If you calculate Christmas bonus percentages based on employee performance, and employees are aware of the system, then the bonuses can serve as a motivational strategy as well as a reward system. Many companies utilize this kind of system to keep salespersons and account executives performing at their highest potential, and it usually works.
Con: Performance-based Bonuses are Biased
There are a few downsides to calculating bonuses based on performance. One of them is that they're biased toward employees who are able to devote all their time to work. Typically, single, younger employees are better able to work longer days and weekends in order to bump up performance scores. Employees with children, and older employees who may be managing health conditions for themselves or elderly parents are usually unable to match the hours of a young, single up and comer, resulting in lower performance metrics. The value of seasoned employees is less visible. They may serve as inspiration, as mentors and as symbols of continuity in the company, which is no less important than performance numbers. In that regard, it’s not really fair if they get less of a bonus, or no bonus at all.
Pro: It’s a Great Way to Owe Less Taxes
Christmas bonuses may not be tax deductible, but they do decrease profits. This is an effective way to lower your end of the year cash balance, and—depending upon how your company is structured—you could end up paying fewer taxes due to giving out Christmas bonuses. Talk to your CPA for details.
Con: Performance-based Bonuses are Pressure Cookers
There’s a lot of evidence to show that employees who work for companies that give performance-based Christmas bonuses feel like it puts far too much pressure on them to perform. Every business wants employees to feel motivated, but putting more pressure on employees isn’t always a smart strategy. Companies that do this tend to have shorter employee retention times. These kinds of work conditions can only be handled so long before the pressure becomes too much and the employee starts to realize that the reward isn’t worth the toll on their health and well-being. The cost to the company is more time and money spent on recruiting, training and managing a bad reputation of having a high turnover rate.
Con: A Precedent is Set
Once you distribute Christmas bonuses the first year, employees will expect it to happen every year. Unfortunately, this is a hard precedent to break, even in years when business profits don’t really warrant giving holiday bonuses. And, even if you try to explain to employees why there won’t be a Christmas bonus this year, there’s often a tendency for employees to take it personally.
Pro: Christmas Bonuses Can be Used to Recruit
If your company regularly gives out Christmas bonuses, you can use this to help recruit new employees. This can be listed as part of the benefits package and could be an effective enticement to attract job candidates. Just be sure that you’ll be able to fulfill that promise in future years, if you plan to make it an official part of your business’s benefits package.
All in all, there’s a positive attitude toward Christmas bonuses. If you need more information about the best way to give Christmas bonuses, how much your company can afford to give and when to distribute the funds, book an appointment with your CPA. Like all things related to finances, there are best ways to give out Christmas bonuses that may help your company when tax time rolls around. In the meantime, enjoy the fact that your business is profitable enough to even consider holiday bonuses for your valued employees.
by Kate Supino
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PS - for you s corporations out there, be sure to evaluate whether "reasonable compensation" has been paid to employee stockholders for 2023. Document the facts & your logic in writing each year too. This is especially important if you take any cash distributions. This is a #1 IRS issue for s corps. Please see link below & prior tax planning blog... Garland
S Corporation Compensation and Medical Insurance Issues | Internal Revenue Service (irs.gov)
Distributing profits (in salaries/bonuses) can also reduce the potential for IRS assessing the "accumulated earnings" penalty. In any case, if a large amount of earnings is retained at year-end, be sure to document in writing why that level of retained profits is necessary to fund future operations. See discussions below from the AICPA... Garland
A resurgence of the accumulated earnings tax? (thetaxadviser.com)
Garland Taylor CPA, Pres. GARLAND TAYLOR CPA PC
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