In the United States, there is no standard policy for holiday bonuses. Instead, companies can choose to offer discretionary bonuses. Below, we have the list of general holiday bonus guidelines to follow as an employer, as well as some information to help employees know what to expect.
General Holiday Bonus Guidelines
While there isn’t a standard set of rules for holiday bonuses, there are a few general guidelines and standard practices to keep in mind.
About 65% of private-sector companies offered (or planned to offer) monetary holiday bonuses to employees in 2019. Note, however, that bonus amounts vary widely depending on company policies.
Some businesses give flat dollar amounts to every employee — this number can vary depending on the company’s size and success during the most recent fiscal year. With this method, bonuses can fluctuate yearly. Alternatively, a business may decide to give a holiday bonus equal to a percentage of an employee’s salary. With this bonus structure, employees would expect their holiday bonus to increase each year their salary increases. While rates and percentages vary widely, the average holiday bonus amount in recent years was around $1,800. However, keep in mind that this average includes everything from nominal bonuses for low-income employees as well as six-figure bonuses for Wall Street employees.
Some businesses that don’t offer percentage or flat-rate bonuses instead choose to offer performance-based holiday bonuses. While the flat-rate bonus is often adopted in the interest of fairness, the performance-based bonus strategy is actually recommended by the Society for Human Resource Management. This type of bonus can be based on an employee’s history/tenure with the company, their skill level, or their hard-working attitude. This can help motivate employees, and it lets them know that their hard work is noticed and rewarded. However, no matter how much you decide to give and to whom, you should always be fair and inclusive. Even if different employees get different bonus types or amounts, everyone should be included.
The holidays can be fun and festive, but at work, it is best to keep things professional. When it comes to gifts as bonuses, avoid giving anything that could be seen as inappropriate or harmful (e.g., liquor, cigars, or something that can trigger an employee’s allergies).
And, for monetary bonuses, keep your personal opinions out of the process. Bonuses should not be awarded simply based on an employer’s subjective feelings about an employee, especially if those feelings are unrelated to job performance.
Holiday bonuses, like raises and other types of bonuses, should generally be treated just like an employee’s salary and need not be disclosed to anyone who is not involved in payroll or processing. Holiday bonuses should be something employees can enjoy and celebrate, not something to worry about or compare with others.
Some companies offer performance-based bonuses at the end of the year. These bonuses are usually set up to motivate employees and to help the company reach its year-end goals. What isn’t always made clear is whether these performance-based bonuses are considered a holiday bonus or are planned in addition to a holiday bonus. In some cases, a year-end bonus may be non-discretionary (i.e., included in the company’s incentive pay plan), while a holiday bonus is discretionary (i.e., variable; not pre-determined). In this regard, it is best to make sure your employees know what to expect.
Similarly, if your company plans its holiday bonuses based on the company’s earnings, bonuses will change year to year. For example, you may be able to offer a $500 flat bonus one year and only a $200 flat bonus the next year. Keep your employees informed about the company’s performance so they aren’t upset about a potentially lower holiday bonus.
Different Types of Holiday Bonuses
Holiday bonuses are often thought of as cash, but bonuses do not have to be monetary. If you decide to give varying holiday gifts, it is a good idea to make sure the categories are clearly defined in advance. For example, everyone in management could get one gift, and everyone in sales another. Or, gifts could vary based on seniority level. Remember to keep it fair and professional. Below, we’ve included a list of holiday bonus gift ideas:
- Gift cards
- Paid time off
- Gas cards
- Food (hams or turkeys for a holiday meal are a popular choice)
- Gift certificates (for things like spas or relaxation centers)
- Tickets (for things like sporting events or amusement parks)
- Miscellaneous gift baskets
In addition to the common gift types listed above, there are also a few things to avoid when providing bonuses. Some of these include:
- Cheap or tacky gifts
- Company merchandise (as this may be seen as a marketing gimmick)
- No bonus/reduced amount with no prior warning or discussion
Tax Rules for Holiday Bonuses
If you’re planning on giving out cash, keep in mind that monetary bonuses have to be reported on an employee’s W-2 form as taxable income.
As an employee, if you receive a cash bonus that has been added to your regular paycheck, you may be taxed at a higher rate, because the rate will be based on the combined amount. However, if you receive your paycheck and bonus separately, the bonus will be taxed at a flat rate of 22% (as long as it is under $1 million).
You can refer to an online tax calculator, such as the TurboTax “How Your Bonuses are Taxed” calculator, to help you determine how much of your bonus will be taxed.
How Do the U.K. and Canada Do Holiday Bonuses?
In the United Kingdom, the government provides a universal, nominal holiday bonus for those who qualify. Typically, it is distributed the first week of December and is an automatic payment of £10. Employees must qualify for certain benefits in order to get the holiday bonus, but the bonus is not taxed. U.K. married couples, civil partners, or those in cohabitation will get two holiday bonuses, one per person. Individual companies are not required to provide bonuses — like in the U.S. — but companies can decide to offer them to employees. These discretionary bonuses are taxable.
In Canada, there is no standard or government-funded holiday bonus. Bonuses are given at the discretion of an individual’s employer. As in the U.S., bonuses may include cash, gift certificates, paid time off, or physical items. Taxability depends on the type of bonus:
- Cash bonuses require income tax, Canada Pension Plan (CPP), and employment insurance (EI) deductions
- Gift cards require income tax and CPP deductions
- Non-cash gifts valued over $500 require income tax and CPP deductions
- Non-cash gifts valued up to $500 are not taxable
Employers must report taxable bonuses on the employee’s T4 slip each year along with the employee’s salary, commissions, vacation pay, and other earnings.
Since holiday bonuses are discretionary and fairly unregulated, there is no “typical” holiday bonus. Cash bonuses can be a flat rate, a percentage of an employee’s salary, or performance-based. Some general Christmas bonus guidelines to follow include being fair, professional, confidential, and honest. Holiday bonuses don’t have to take the form of cash; they can come as gift cards, paid time off, gas cards, company-branded clothing, food, gift certificates, or gift baskets. While Canada is similar to the U.S. in regards to holiday bonus rules and regulations, the U.K. government gives a holiday bonus to all who qualify.