How to Be Fair with Year-End and Christmas Bonuses

Jul 24, 2024

Find out more about:

How Much Should a Christmas Bonus Be?
How to Calculate a Christmas Bonus
Who Gets a Year-End or Christmas Bonus?
How Much Should You Spend on Each Employee’s Christmas Bonus?
When are Christmas Bonuses Given?
Are Christmas Bonuses Taxable?

A Christmas bonus is a positive way to reward your staff and say thank you for the hard work over the past year. And, with the holiday season right around the corner, now is the perfect time to think about whether employees should receive a year-end bonus and how to be fair about distributing them.

In 2020, a survey of 189 US companies¹ found that over 33% of businesses reported they would offer a year-end bonus – cash or gift card – to all employees.

Although employees certainly appreciate the show of goodwill, it can be difficult for the boss to decide if a year-end or Christmas bonus is feasible, and if so, what form it should take (money vs. physical gifts) and who should get what (same for all vs. performance-based rewards).

We’re going to take a look at what you should consider when it comes to Christmas bonuses for employees.

How Much Should a Christmas Bonus Be?

It’s that age old tale: is any Christmas bonus better than no bonus? Of course, anything is better than nothing, but remember that employees may see their bonus as a reflection of their work. Some staff may see a small bonus as a motivating gesture, while others might prefer the chance to earn a performance-related raise. While every employee is sure to say yes to any bonus (cash or gift), another question you need to consider is: can your business afford it?

Remember, it doesn’t have to be a huge lump sum in their salary at the end of the year. A token gesture can also be appreciated. For example, the United Kingdom’s Queen Elizabeth II gives each of her staff a Christmas pudding and a gift or book voucher (the value varies depending on their length of service)². If it works for royalty, then who’s to say it wouldn’t work for your business.

How to Calculate a Christmas Bonus

Christmas bonuses can be calculated in several ways. Firstly, you’ll want to examine your profits for the year and budget for the upcoming year to determine whether there is enough left for gifts and a Christmas bonus. Profits should also determine the size of each gift. If you’ve been in the habit of giving holiday bonuses but can’t afford to do so this year, then it’s a nice gesture to warn employees ahead of time not to expect the additional income.

If you’ve decided to offer holiday bonuses, you might be wondering how to be fair when giving them out. Whether your bonus policy is perceived as fair essentially boils down to two questions: who gets a bonus, and how much do you spend on each employee?

Who Gets a Year-End or Christmas Bonus?

The purpose of a year-end bonus is to thank your employees for their service throughout the year. This means deciding who gets a bonus is easy: everyone. The last thing you want to do is create resentment and jealousy among your team – this could lead to staff leaving.

If you want to give one of your employees a more personal gift, then the best way to do that is away from the office and outside of the business’s year-end or typical Christmas bonus program.

How Much Should You Spend on Each Employee’s Christmas Bonus?

The easiest and simplest method of dividing up holiday bonuses is to give each of your employees the same amount regardless of their position at the company. Admittedly, this may leave some high-level employees feeling resentful that they received the same size gift as an entry-level part-timer.

Another option is to set the gift amount by employee tier, making it the same for every employee at the same level. Managers, for example, get a larger gift than their subordinates.

If you really want to show your employees appreciation around the holidays but your business can’t afford to pay year-end bonuses, then an excellent alternative is to gift employees with extra paid time off — either a predetermined day that everyone gets off or an extra floating holiday that employees can use at their own discretion. After all, they do say time is money.

When Are Christmas Bonuses Given?

Typically, the year-end bonus is given to staff in the last payment of the year – usually before Christmas. If gifts are given instead, the Christmas party could be a good place to hand them out. While some businesses may think including the bonus in January’s payment might be a better way to say, “thank you for the hard work, here’s to a new year”, employees may be grateful for the extra cash to spend on food and gifts for loved ones during the holiday season.

Are Christmas Bonuses Taxable?

The last thing anyone wants is for tax to swallow a Christmas bonus. The Internal Revenue Service (IRS), however, considers bonuses to be “supplemental wages”, so while they are taxed, it’s at a different rate to standard salaries. Employers can withhold federal income taxes from bonuses at a flat rate of 22%³, or use an aggregate amount when giving a bonus with a salary to figure out the withholding. If not enough has been withheld, employees could owe the IRS tax.

Will you be giving out year-end or Christmas bonuses for employees this December? For more tips on how to grow your business over the holidays and into the new year, take a look at Groupon Merchant’s blog.