It’s the season of giving, and many workers are looking forward to finding out what kind of holiday bonus may be in store. In an article appearing on the JD Supra website, those organizations that have done well and who want to show their appreciation for the workers who helped make that happen, there are a few rules from the U.S. Department of Labor to keep in mind.
In terms of wages, hours and compensation, a bonus could change the overtime pay for workers who are considered non-exempt employees. The DOL is specific about such holiday bonuses and says that the regular rate of pay “…. shall not be deemed to include ‘sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service.” The federal agency also states that these amounts should not be based on performance, hours worked on the job.
Some businesses, however, do base the amounts of holiday bonuses on these factors. If an employee is being given a bonus for reasons of hours worked, efficiency, production or if a bonus at year’s end is specifically stipulated within their employment contract. If any of the above is applicable then the holiday bonus would not be considered a ‘gift’ or discretionary in the eyes of the federal government.
An important exception to make careful note of would be if a gift is given as a gift for years of service, depending on the specific situation of the individual worker, such a bonus may or may not be able to be excluded from the regular rate of compensation.
The best course of action is to review all withholdings information with the worker in order to determine what works best for their own personal tax situation. Deferring amounts to their IRA, Health Savings Account or Flexible Spending Account may be an option that will actually be a bonus, rather than an increased tax liability in the New Year.