End of the Year Employee Appreciation
With Thanksgiving right around the corner, it only means one thing Christmas and the Holidays are coming, and as usual, they are hurtling at us very quickly. Christmas decorations have already been seen at Lowes and Home Depot.
So how do you show appreciation for your employees at the end of the year and best benefit them?
End of year employee appreciation is the time of year that bonuses, presents, tips, parties, and much more occur for some inner office excitement. However, let’s make sure that you have the most significant benefit from these expenses, not just in employee morale but also in tax benefits.
Bonuses are one thing I hear of all the time as that is the gold standard for end-of-the-year employee appreciation, but how are you recording them, and are you harming your employees by providing this bonus?
Bonuses, like many other types of compensation, are taxable, and unless you are giving them cash (which you still have to account for somehow), it is challenging to hide it from the IRS. You can record the bonus as a gift. Nonetheless, you are harming yourself because of how gifts are deducted (and there are limits on how much the gift can cost for the full deduction, i.e., you can’t gift someone $1000 and deduct that all). Ultimately, the best thing for your business is, to be honest, and record it as a bonus, because that is fully deductible, but is that what is best for your employee? It depends; straight bonus checks are taxed differently than a paycheck at a flat 22% no matter the employees’ tax bracket. This is great for the upper four tax tiers, but those start at $86,000 for individuals (which probably is higher than most of your employees make). On the other three, tax brackets this is costing them upfront than if it came with their regular check, and until their tax return arrives back, they are out of that money. Take the time to understand your employees’ circumstances and discuss their taxes with their tax preparer to best benefit them. This small step can make this bonus check mean a lot more to them.
Now, what if you give them a check with no taxes removed?
Well, that’s fine, but when they get their W-2 at the end of the year, it should still show up on there so that you as the business owner benefit, and when they file their taxes, they will owe taxes on that money. Some people will be fair here, and the paid-in taxes will cover this for them, and they still may get a refund, others though, will have to pay in money to cover that tax burden. While on the surface, talking about bonuses is excellent in an application, it can be completely different due to the tax burdens that you are forcing on your employees. Take the time to sit down with someone to make the best plan not just for your business but your employees; in the long term, this will make them happier.
What about clients?
Tis the season to gift, right? For many companies, yes, they send trinkets, gift baskets, cups, thank you notes, mailers, etc., to their clients that they have worked with in the past year, but are you making sure you get the best benefit out of those items? Postcards are great; they are inexpensive, but your name is out there and can be considered advertising or mailing. Even sending a magnet or company logoed item is excellent, as long as it is less than $4. Over that, though it gets more complicated, personalization and engraving do not count towards deductions, and there is a cap on how expensive the gift can be. So when rewarding your customers or employees, keep this in mind so that you are benefiting the most from these gifts yourself and not just benefiting from the goodwill or potential of new business.
This is the season the customers tend to be more willing to provide tips and generally larger tips, but how are you recording them? Here we will be talking about the legal and official way, so no, I got cash and pocketed it (sorry, we can’t officially work like that). Generally speaking, you get paid tips through a credit card or check, which means we need to record the income as tip income; if you do not pay out this money to employees, you are on the line for paying taxes. If you pay the tips out, make sure they are paid out as tips, so they are recorded correctly on their W-2, so they are taxed as tips and not regular income. Tips are again taxed at a different rate than other income so let your employees receive the full benefit of tips.
How do you record it in your books?
On top of that, how do you record it in your books? Well, the easiest is to create a line item for tips that record the income to tip income and then have a payroll account that pays out the exact amount to counter the tip income. However, some credit card processors push over the invoice without recording tips; one that we use all the time is HouseCall Pro, and below you will find a video detailing how to take care of those tips.
So, we are coming to the end of the year, and you want to throw a special celebration for your employees to thank them for one more good year. Maybe a barbeque or breakfast for your employees, some music, a family meal, or just a standard holiday party. How do you take advantage of that? Well, typically speaking, meals and entertainment are limited to a 50% tax deduction, which is not that great, and if you invite customers to your holiday party, you are still going to face this issue.
However, if this is a holiday party just for employees, take advantage of giving them a real nice party and deducting the expenses for your taxes. This shows your appreciation without increasing their tax burden and decreasing your tax burden. Want to make the party even better? Provide a de minimis fringe benefits, sorry for the accounting jargon, which means a noncash small random gift that is infrequent— a holiday Turkey or Ham, or some materials or merchandise for them. There is technically no limit on this, but that doesn’t mean you can give away thousand-dollar items, don’t give them a reason to audit you. This is a tremendous little loophole to provide appreciation at no additional tax burden.
One trend that I have seen a lot lately and agree with is instead of a cash bonus at the end of the year, bring out a supply house or outfitter with tools and clothing and tell the guys you have $XXX amount of money to spend, get whatever you want. They can get new shoes, new tools, or anything the vendor has. That is their’s for their bonus instead of cash since these are material things that you could conceivably buy in the first place, then you can expense them to uniform purchase, tools, or job supplies depending on what they choose and everyone benefits. And since the items they choose will be used for you at your job, you can easily claim it for a write-off. Another option over material or cash bonus at the end of the year is contributing to a ROTH or Traditional 401K based on current regulations with those. ROTH plans are Post-tax contributions while Traditional are Pre-Tax, but with traditional plans, you can defer a certain amount for the future, and your employees can save on current taxes. Make sure to talk with an accountant on 401Ks and with an investment advisor, as this is a multi-faceted decision.
Overall the end-of-year season can be great for incurring some tax-deductible expenses, but make sure you understand what you are getting into beforehand to make the most out of it in the long run, and remember, this is not just for you. Consider how you will be affecting your employees too!