Small Business Guide to Holiday Bonuses

This article is for informational purposes and is not meant to provide legal, regulatory, accounting, or tax advice. 

The holidays are just around the corner and now is the perfect time to start thinking about whether or not you’ll be offering holiday bonuses. A holiday bonus is a great way to show your team that you care and appreciate their dedication to your business. However, this kind of gift will all depend on what you can, and can’t afford as you close out the year.

A 2018 Bank of America survey found that 38% of small businesses give a cash bonus, which was up from 35% in 2017. When determining your framework for holiday bonuses, consider the following points:

Determine if you can afford it

Your job is to be fiscally responsible for your business. Before making any promises to distribute bonuses, first, review your profits from the previous year, forecast your future sales and earnings, create your plan and budget for the new year, and then decide what your small business can afford.

If you’ve had a great year, it could make sense to pay out bonuses. However, if there are extenuating circumstances like company debt that needs to be paid down, consider allocating extra profits there.

It should be clear to your employees that bonuses will depend on how well your company meets its financial goals and obligations.

Determine how much bonus you’ll pay for bonuses

According to one survey, the average holiday bonus is $858. What you’ll be paying out for bonuses will depend on your bonus structure. Here are 3 different bonus structures to consider.

Flat rate

Using a flat rate cash model, you can simply decide a fixed amount that each employee will receive across the company. This is an equitable way to show thanks to your team. This can also prevent negative reactions that employees might have when if they find out that other people got higher bonuses than them.

Salary based

With this model, you give each employee a certain percentage of their salary (for example, 1.5% of salary). This method keeps your payments transparent across the employees in the company and tied to clear criteria.

Performance bonus

This model has you pay employees based on achieving predetermined goals or targets. This kind of bonus will help you reward and motivate top performers.

In order for this kind of bonus model to work, each employee must fully understand their performance targets and the criteria for meeting them. Otherwise, they may not feel satisfied with their bonus and might feel that the payouts are unfair.

Other models like profit sharing can work too depending on the structure of your organization.

Pros and Cons

We’ve discussed what kind of bonuses could be given out. But just as important as the pros and cons of giving them.

Pro list:

• Giving your team an extra chunk of change towards the end of the year is a great way to build engagement, remotivate them, and help them enjoy their holiday season
• When considering joining your organization, new hires might also inquire about the bonus structure and take that into consideration as they evaluate their offer
• Giving bonuses are easier to maintain and keep up with than salary increases. A bonus is a once a year payment, where a salary increase is a payment that would need to be maintained and increased as the employee progresses in the organization
• You may be eligible to receive a tax deduction when giving out bonuses

Con list:

• This will become an expectation each year and people will be upset if you’re not able to pay them out one year
• Without a clear structure, people will get upset if they find out some people’s bonuses are larger than theirs, or if they didn’t receive a bonus at all
• It can cut into your profit margins

If cash bonuses are not in the cards for your business this year, there are other ways to offer some perks. Some businesses prefer to give their employees a few extra days off, while others will let them work from home. Consider buying your team tickets to an event, picking up the tab at the holiday dinner, giving them a gift card, or anything else to show them you care.