A lot of business owners like to give their employees bonuses at the end of the year. This is a great way to make team members feel valued and appreciated. However, there are various types of bonuses to consider, including how they are awarded and taxed.
When most people think of a holiday or year-end bonus, money comes to mind. There are some tax codes you need to understand when giving a monetary bonus. Since it is a form of compensation, it is therefore taxable.
You might think a bonus should be based on amount of time an employee has been with the company – the ones who have been there the longest get the most and the newer ones receive the least. Or you might want to be fair and give everyone the same amount. But how does that motivate your team to work hard and sell more? And what if your shop has a rough year? As the shop owner, you could end up looking like the bad guy!
At Paar Melis, we always recommend performance-based bonuses if you are going the monetary route. As a business owner, you are able to deduct the cost of any bonuses you pay to your employees, as long as it represents pay for services rather than a gift.
Performance-based bonuses are the best way to keep everything simple and fair across the board. For example, for technicians, track their hours sold from December 1st of this year through November 30th of next year. (You’ll be able to give out bonuses by mid-December). This way it is a production bonus. You could give techs somewhere between $0.25 and $0.50 per hour. (For service advisors we recommend $0.10 – $0.25 per hour. This considers all the hours for the shop as a whole.) Hours can be tracked easily throughout the year for each employee, allowing you to put away the right amount each month into savings for the year-end bonuses.
If non-monetary gifts are more your thing, consider the performance-based bonus along with a “de minimis” gift. These gifts are small enough that they are not considered taxable events. Items less than $100, and not cash or cash equivalent (i.e. gift cards) are able to qualify as a “de minimis” gift.
Performance-based bonuses can incentivize your team to work hard year-round knowing that the more efficient they are, the more they will be rewarded. Motivated employees are usually happier, and this can decrease your turnover rate. As we all know, it’s not easy finding good techs!
