Bonuses, gifts, and charity … oh my!
It’s that time of year when business owners want to reward their employees, thank their clients, and make some personal charitable donations to help reduce their tax liability and spread some cheer.
It’s important to be mindful of IRS rules and regulations when celebrating the holidays with bonuses, gifts, or donations! That has been the focus of my live videos in December, and I wanted to share similar information on my blog.
Employee Bonuses
Did you know that employee bonuses must be run through payroll and are taxed as compensation?
Yes, I know. Paying taxes on bonuses is not popular, but it's the law. You need to run your employee bonuses through your payroll program so that the amount shows up on your employee's W-2.
If you have 1099 contractors and want to pay them a bonus, that amount must also be included on their 1099-NEC. Be careful, though! Paying a contractor a "bonus" might nudge their work over into the "employee" column rather than the "independent contractor" column. You don't want to run the risk of having the IRS decide a worker was misclassified and charge you for unpaid payroll taxes!
One more thing: many want to pay a flat amount per employee, say, for example, $500. With taxes being taken out, the actual amount that the employee receives will be less. If you want to make sure that they receive an actual $500 after taxes, use the "grossing it up" function in your payroll program. If you aren't sure about this, ask your payroll company for help to know how much to pay per person to ensure they get the desired flat rate.
Finally, check with your bookkeeper to make sure you have enough cash flow to make generous bonuses. You want to give nice gifts, but not so much that it strains your business.
Client Gifts
According to the IRS, gifts to clients can be deducted up to $25 per person per year. This is also important to keep in mind if you give client gifts at other times of the year! Any item under $4 with your logo on it does not count as part of the $25 limit, so you can pass out all the swag you can carry!
Charitable Giving
Want to do some personal charitable giving? Make sure you're giving to a reputable tax-exempt organization! The IRS makes this easy with the Tax Exempt Organization Search. You can use this tool not only to tell which organizations are tax-exempt, but to see if an organization has had its exempt status revoked. You can easily search by city and state, or by the organization’s EIN if you know it. Unfortunately, you can’t look it up by name but the results are in alphabetical order, so it should be easy to find.
If you donate to a qualified organization, be sure to keep an itemized receipt for your taxes. There is absolutely no shame in deducting the donation from your taxes. This includes clothing donations to thrift stores! All donations must be made by December 31 to count for 2025 tax purposes.
Need help in the new year? Get on my schedule in January for help getting your books in order for tax time and start the new year strong with accurate, up-to-date financial records!