Holiday Bonuses: The Good, the Bad and the Fruitcake

While giving holiday bonuses to hard-working employees sounds like a simple enough proposition, it’s anything but.

“Holiday bonuses are very tricky,” said Kate Zabriskie, founder of Business Training Works. “The wrong bonus sends the wrong message.”

She must be right because employees are full of tales of holiday woe.

Valerie Bent regularly worked 55-hour weeks at a Los Angeles-area investor relations firm, which gave bonuses equal to about 40 percent of an employee’s annual salary. But in 2004, during the firm’s most profitable period ever, the employees ended up with nothing, she told Entrepreneur.com. The firm decided to use the bonus money to open a new, posh office.

Bent was so angry that she left the company and started her own business: Big Feet Pajama Co. She made $1 million in revenue last year. What did she give her employees as their holiday bonus? A vacation to Italy.

Looking back, she said, “It was the greatest thing that ever happened to me.”

Wall Street executives can’t be complaining about their bonuses this year. Lloyd Blankfein, the new chief executive of Goldman Sachs, for example, received a pay package that topped $50 million, the Wall Street Journal reported. John Mack of Morgan Stanley will take home a bonus of more than $40 million this year.

Wall Street certainly isn’t Main Street. Less than half of small businesses — 47 percent — are giving holiday bonuses this year, according to a survey by American Express. That’s down from 54 percent last year, USA Today reported.

Kristen Lunceford told Entrepreneur.com that no gift would have been better than the lousy one she once received from her millionaire bosses at an affluent regional magazine in Scottsdale, Ariz.— an extra-large Hershey’s Kiss.

Inexpensive isn’t necessarily bad. Employees understand if the industry is strapped for cash, but Zabriskie advises employers to being thoughtful about holiday bonuses. Think about what you’d like to receive yourself. Be fair to all employees, and don’t give anything too personal. “If you give a bonus out of obligation, employees will know it.”

One gift to avoid? Fruitcakes all around.

Employees tend to remember their holiday bonuses, and that one may be complained about for years to come. The up side of a fruitcake is that it’s not taxable.

A gift to an employee is tax-free only if it qualifies as a “de minimus” gift, meaning so small and infrequent that accounting for it is not practical. A holiday turkey, theater tickets, flowers or books would be considered tax-exempt.

Gifts of cash or gift certificates, which are considered cash equivalents, are considered wages, so the employer must withhold income and payroll taxes. The amount must be added to the employees W-2 income. A $50 gift card, for example, is $50 of taxable income.

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