Holiday Bonuses Unwrapped: Everything Employers Need to Know

'Tis the season of giving — and for employers, that often means navigating gratitude and fairness when it comes to holiday bonuses. 

Whether it’s a festive thank-you or a year-end performance reward, how you handle holiday bonuses says a lot about your company culture. 

Get it right, and you’re the hero of the holiday party. 

Get it wrong, and, well, let’s just say Scrooge wasn’t a great leader.

In this article, we’ll cover everything you need to know about holiday bonuses so you can administer yours successfully.

What Are Holiday Bonuses?

Holiday bonuses, often called Christmas bonuses or year-end bonuses, are extra payments or gifts that employers provide to their employees, typically around the holiday season. These bonuses recognize and reward employees for their hard work and contributions throughout the year.

While bonuses are typically monetary, they can take other forms, like:

• Gift cards or vouchers: Redeemable at popular retailers, restaurants, or experiences 
• Physical gifts: Things like electronics, gift baskets, or company merchandise
• Extra paid time off: An additional day or more of paid leave around the holidays

How Do Christmas Bonuses Work?

Christmas bonuses can take many forms, from cash to creative perks, but their impact often hinges on how and when they’re distributed. Understanding the timing, calculation methods, and taxation requirements can help you design a bonus program that hits the right note.

When Do Companies Give a Holiday Bonus?

Christmas bonuses are typically paid out in early to mid-December, before the holiday season.

Though less common, some companies may split the bonus into two payments — one before Christmas and one after the new year.

What is the Average Holiday Bonus?

While the average holiday bonus depends on many factors — like company, industry, etc. — one survey revealed most employers plan to dole out anywhere from $100-$1,000 this holiday season.

Every year-end or Christmas bonus is different, but often, they are calculated as a percentage (like 1% to 10% of an employee's salary), or using tier-based factors like job title, performance reviews, length of employment, type of employment (full-time or part-time), etc.

Alternatively, a company can opt for a flat rate amount instead, such as a $500 or $1,000 bonus per eligible employee.

Do Most Companies Give a Holiday Bonus?

While Hollywood might portray the annual Christmas bonus as a hallmark of the holiday season, it’s not as widespread as you might think.

According to the Bureau of Labor Statistics, 23% of employees who worked at companies with fewer than 100 workers received holiday or year-end bonuses. However, only 11% of larger companies gave their employees the same.

Are Holiday Bonuses Taxed?

The IRS considers holiday bonuses taxable supplemental income, so they are subject to regular payroll tax withholdings.

When determining how to withhold taxes on holiday bonuses, you have two options:

1. Withhold a flat 22% federal withholding rate.
2. Or, combine the bonus amount with one of the employee’s regular payroll, and withhold the standard tax deductions at the usual rate.

Do International Employees Receive Holiday Bonuses?

The practice of providing holiday bonuses to international employees can vary significantly depending on the cultural context and local norms:

• United States: In the US, it is relatively common for employers to provide some form of holiday bonus, often in the range of one to two weeks' pay, to both domestic and international employees.
  
• Europe: Many European countries have strong labor laws and cultural expectations around end-of-year bonuses. For example, in Germany, many companies provide "Weihnachtsgeld" (Christmas bonus) to employees.
• Asia: Practices around holiday bonuses in Asia can be more varied. In China, for example, it is customary to be paid a bonus at the Lunar New Year, while in Indonesia, bonuses are mandatory.

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Learn More: Global Payroll Uncovered: Strategies for Seamless International Payroll

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The Benefits of Holiday Bonuses

Holiday bonuses go beyond the spirit of the season — they can make a tangible impact on your organization through improved:

• Employee motivation and engagement: Holiday bonuses reward hard work, boost morale, and motivate employees to perform even better.
  
• Talent attraction and retention: Competitive bonus programs help attract top talent and retain valuable employees.
• Company culture: Bonuses foster a sense of shared success and reinforce the company's appreciation for its workforce.

How to Give a Holiday Bonus

While every organization and its bonus structure differs, there are a few important steps to follow when giving a holiday bonus.

1. Assess Your Company's Financial Situation

The first step is carefully evaluating your company's current financial health and projections.

Consider factors like revenue, profits, cash flow, and any budgetary constraints to determine how much your organization can realistically afford to spend on holiday bonuses without jeopardizing its long-term financial stability.

2. Analyze Industry Benchmarks and Standards

Research what similar companies in your industry are offering in terms of holiday bonuses. Look at data from industry associations, market pay data, compensation surveys, and competitor communications. This will help you benchmark your bonus amounts against standard practices and expectations in your field.

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Learn More: Pay Pacesetters: Mastering the Art of Salary Benchmarking

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3. Determine Employee Eligibility and Bonus Structure

In addition to considering our company's financial outlook, consider the individual employees who will receive the bonuses. Consider factors like:

• Tenure: Longer-serving employees may warrant higher bonus amounts.
• Performance: Top performers should be rewarded more generously.
• Role and Responsibilities: Employees with more critical roles may warrant larger bonuses.

Once you've assessed your finances and considered employee factors, you can establish a bonus structure. This could involve:

• Flat, across-the-board amounts for all eligible employees.
• Tiered levels based on factors like title, tenure, and performance.
• Percentage-based bonuses tied to salary or other metrics.

Once you've determined the bonus structure, be upfront and clear when announcing your holiday bonus program. This includes explaining the eligibility criteria, expected amounts, and distribution timeline.

Of course, encourage employees to reach out with any questions or concerns, too. Transparency builds trust and confidence in the bonus system's fairness, and it helps manage employee expectations to avoid misunderstandings.

Best Practices for Distributing Holiday Bonuses

Following the above steps is crucial for effectively disturbing holiday bonuses. But, to ensure that your bonuses resonate well with employees, follow these few best practices, too:

Establish Clear and Equitable Criteria

Whether your organization offers a flat rate, a performance-based bonus, or something else entirely, ensure that your criteria are fair and equitable and reflect your company values.

Ensure your bonus structure reflects true pay equity — devoid of any unbiased or unequal treatment. To drive pay equity, view each employee’s compensation history, drilling down into specific groups and demographics.

Be Transparent if You Can’t Deliver a Bonus

No matter how much an organization thinks ahead and budgets, not everything will happen according to plan. If your organization finds that it can’t fulfill the bonus promises it made, be sure to:

• Communicate transparently: If the company faces financial constraints or other challenges that prevent paying the typical holiday bonus, it's critical to provide clear and honest explanations about the factors behind the decision, such as the overall business performance, economic conditions, or other extenuating circumstances.
• Highlight alternative benefits: While you may not be able to deliver the monetary bonus, emphasize other benefits the company is providing, such as additional time off, gift cards, or celebratory team events.
• Express gratitude and empathy: Even without a bonus, take the time to sincerely thank employees for their hard work and contributions throughout the year. Verbal recognition can go a long way. Plus, be sure to validate their feelings and avoid dismissing their concerns.

Time it Well and Make it Personal

The best time to distribute holiday bonuses is typically mid-to-late December, right before the holiday break. This gives employees the time to fully take advantage of the extra funds.

Whenever you send out your bonuses, look for ways to make the bonus distribution more personal and memorable for each employee. This could include:

• Handwritten notes of appreciation from managers or company leaders.
• Small, thoughtful gifts or experiences tailored to individual interests.
• Opportunities for one-on-one conversations to discuss the bonus and future goals.

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Learn More: 16 Employee Appreciation Ideas to Show Gratitude

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Listen and Improve

Want to really make employees feel seen and appreciated? Improve your bonus structure and payout process every year by:

• Conducting post-bonus surveys to gauge satisfaction and gather suggestions
• Hosting focus groups or one-on-one interviews to understand employee perspectives better
• Analyzing metrics like retention rates, engagement levels, and productivity

Go Beyond Bonuses

Don’t just leave acknowledgment and gratitude for your employees to the very end of the year.

Instead, create a culture of recognition that every employee wants to be a part of, with regular gifting of redeemable rewards and automatic recognition of milestones like work anniversaries and birthdays. 

Get the Right Tools 

Administering end-of-year bonuses and creating a culture of recognition takes time and effort. But with the right tools and technology, your organization can automate and organize practically every employee appreciation tactic.

From natively handling bonus administration with custom logic to setting up approval workflows and handling compliance, Paylocity’s payroll features let organizations automatically manage all their bonus payouts — even their taxes.

Celebrate and Compensate With Paylocity 

Determining and administering year-end bonuses are often an annual hassle for employers. But, with an all-in-one platform like Paylocity, you can:

• Manage compensation: Monitor your budget, automate compensation plans, and create and distribute a view of total compensation, including salary, benefits, gym memberships, and more. 
• Reward and recognize: Go beyond bonuses with a complete rewards and recognition platform for connecting with employees and celebrating milestones so everyone feels appreciated all year round.
• Follow-up and survey: Check in with employees using a “Compensation Q&A” through Paylocity's Community tool to ensure that you have all the information you need to make informed compensation decisions.

Want to learn more? Request a demo of Paylocity today!