The tax implications of the beloved Christmas bonus

If you have a small business and you want to thank your employees with a holiday season bonus this year, you need to let the person or team handling your payroll about it now.

That is because if the gift is going to be cash or a gift card that can be used as cash to purchase what the recipient want, it is taxable if the total combined value of gifts you have given the employee in the course of a year is $500 or more.

This bonus must be delivered to them through payroll and the appropriate taxes taken off.

Advise payroll departments now

For the many employees who outsource payroll, this is a reminder to send a notice now about your Christmas bonus intentions. Do not leave this to the last minute, or your good intentions can turn into a bit of an end of year nightmare.

Every year we have employees who generously give their employees gift cards without first notifying their payroll departments. The payroll staff then have to adjust the payroll afterwards, a much harder task than if they had been given sufficient notice to set it up right in the first place.

What you can do

You can give your employees tickets to an event on a specific date and time without any tax implications. Tickets are not considered to have cash value since there is no element of choice involved.

You can give an employee a number of small non-cash gifts and awards with a combined total value of $500 or less annually.

However, if the fair market value of the gifts is more than $500 in the year, then the amount over $500 is taxable.
Exceptions to these rules are items considered to be of trivial value such as coffee or tea, t-shirts with the corporate logo on them, mugs, or plaques or trophies.

The distinction between what is not taxable and what is

Over the course of a year you can give employees gifts that have a combined tax value of less than $500 provided they occur for such reasons as:
– Religious or other special event
– Birth of a child
– Wedding
– Birthday
– Long-standing service award – In that case it can occur only one in five years, and the first $500 is tax free. Another over $500 is a taxable benefit.

Awards for employment-related accomplishments are allowed when there is a clearly-defined criteria, a nomination and evaluation process and a limited number of recipients.
However, rewards such as sales bonuses are taxable.

So play Santa with a good heart this holiday season and earn some extra appreciation from your employees. But be sure to handle the taxation aspect correctly so the gift doesn’t ending up leaving a bad taste with a tax surprise next April!

Certified professional bookkeeper and certified tax specialist Elena Ivanova is managing director of Piligrim Accounting Inc., a national accounting and tax preparation service based in Richmond Hill, Ont. You can reach her at elena@piligrim-accounting.com.

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