As the year winds down and the holidays approach, it’s time to consider paying your nonprofit staff a bonus. The employees of your organization have worked hard, often for less than they’re worth, so a year-end bonus is a great way to show your appreciation. But what does that bonus look like…is it a holiday bonus or a year-end bonus? Should it be cash or something else? If it’s monetary, how should your nonprofit account for it? We’ve got answers to these questions and more. Here’s how to be a sweet Santa rather than a stingy Scrooge to your team this holiday season.

What’s the difference between a holiday bonus and a year-end bonus? 

A holiday bonus is typically given as an unexpected, extra surprise. If you’re giving out a holiday bonus, be sure to provide one to all your employees, even the new guy that got hired last week. Alternatively, a year-end bonus is typically designed to reward individual performance over the past twelve months.

Is it ok to pay nonprofit employees a bonus?

The short answer is yes, but it comes with some caveats. Bonuses are considered to be part of the overall compensation received by an employee. Since bonuses are taxable wages, you should run those checks through payroll. Note that bonuses are subject to withholding, Social Security, and Medicare taxes, so you may want to gross the total amount up enough so that the employee receives the (possibly expected) correct flat net amount.

Do nonprofit employees usually expect bonuses?

Most employees base their holiday bonus expectations on past years’ experiences. However, if a bonus isn’t possible due to budget constraints, be frank with staff as early as possible, so they’re aware. On the other hand, if your organization is having an excellent financial year, avoid setting bonuses too high, as it may set exceedingly high expectations in the future.

Can I give gift cards to my employees instead of a bonus? 

You certainly may, but you’re not skirting the “de minimis rule.” The IRS still requires that all cash gifts, including gift cards, are considered taxable wages. Any gift cards that can buy “general merchandise” or have equivalent cash values trigger a payroll tax liability for your organization and your employee.

What is the de minimis rule? 

In the past, employers could give employees cash or gift cards for amounts less than $25 without any tax concerns. These were known as de minimis fringe benefits or gifts. Today that is no longer the case since all cash gifts, including gift cards, are considered taxable wages. The IRS states that a de minimis benefit is “…one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.”

What can I give to my employees that are not considered wages? 

Employers may still provide several perks to employees that are considered de minimis and not taxable to the employee. These include tickets to entertainment events (sports, theater, etc.); traditional holiday and birthday gifts with a low fair market value (with no cash or cash equivalent); a holiday turkey or ham; flowers; and some occasional treats like snacks, coffee, doughnuts, and soft drinks. Check the U.S. Department of the Treasury rules for ideas that will help keep you compliant.

What other ways can I reward employees during the holidays?

Everyone loves extra time off around the holidays, so consider an early dismissal on a Friday. Or have a holiday party during office hours. It could be a potluck with a white elephant gift exchange. Of course, a heartfelt, handwritten note of appreciation is often appreciated more than anything monetary and costs nothing but a bit of your time.

No matter what you give your nonprofit employees this year, properly account for those benefits to avoid potential issues with the IRS and your state’s tax authorities. If you need help navigating that, our team of expert nonprofit accountants is happy to help. Why wait? Get clarity and peace of mind today, and schedule your free call now. We look forward to talking to you soon.

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