What do you think is the easiest way to give a holiday gift to your employees? Think again if you think it is a gift card for $200 to HEB. Here are some helpful tips regarding employee gifts. I preface this with the fact that I am not a CPA.
First, what qualifies as a taxable gift and what does not? What does de minimis mean? Gifts are taxable regardless of their value and must be included on the employee’s W-2. To be non-taxable, the gift will have to be so small in value that it would be impractical to track.
Cash and gift cards are taxable. They are considered compensation, no matter how small.
Non-cash gifts that are valuable or frequent, such as season tickets or club memberships, are taxable income.
A non-taxable, de minimis gift might be an occasional holiday or birthday gift. A holiday turkey or flowers would qualify in this regard. Occasional meals for a holiday party or cookout are tax-exempt. Giving employees an occasional sports or theater ticket or flowers when they are ill or experience a loss should be acceptable. Buying a table at a charity event and offering the employee two tickets to fill the table is acceptable.
Giving an employee an award is also acceptable if it is a physical item. Giving a cash gift card or a trip is not acceptable. Awards must stay within a dollar limit to be tax-free.
Now, what about a bonus or just a little extra?
What is the easiest way to give a nonexempt/hourly employee a bonus and avoid having your payroll department go back and recalculate everyone’s weekly overtime for the week you provide the bonus?
We first consider pay as our main compensation, which is an accurate statement. Pay considers base pay, incentives, and differentials. Base pay is generally your annual or hourly pay, depending on whether you are exempt or nonexempt. How an employee is classified could be the factor that decides if you sink or swim if the Department of Labor (DOL) comes knocking. The government departments may be understaffed, but do not give them a stick to beat you with by making it up as you go.
Incentives are compensation for performance above and beyond. This includes bonuses, which come in all shapes and sizes as well. Differentials are typically paid for working the night shift or weekends. This is not overtime, but it does change a nonexempt employee’s hourly base.
If any nonexempt/hourly employee works beyond 40 hours per the employer’s designated work week, they get time and a half.
There are different ways to increase compensation for employees. Merit increases should be based on a job well done. Step increases are based on the years a person has worked for your organization and/or in the same or similar job for past and current employers.
Promotion increases are for being promoted to another job with a higher rank and responsibilities.
Some organizations give everyone across-the-board increases, while others provide a Cost-of-Living Increase (COLA).
Organizations must also provide pay differentials when overtime is worked and the employee is nonexempt/hourly. Some employees may be exempt/salaried and receive differential pay for working weekends and holidays. This is rare, but I have seen it given to pharmacists.
Premium pay is also pay for working on holidays and weekends. Shift differentials are typically paid for working less-desirable shifts. A night nurse is a prime example of this type of pay. Critical employees may get emergency shift pay during emergencies like a hurricane.
Hazard pay applies when you work in an environment that is considered hazardous. “On call” and “call back” may also be a pay differential but be careful about deciding what is truly “on call.”
Reporting pay means you are paid to show up, even if there is no work, and travel pay pays you for the time you travel. There are definite rules for nonexempt/hourly employees who might get paid for travel time and who will not.
An employer might also pay an employee to work in another geographic area where the cost of living is higher. Back in the Pandemic, when all those Californians moved to Texas, their employers considered cutting their pay. After the massive influx of people to Texas, I would suspect that real estate may still be cheaper than in California, but the gap has narrowed.
Lastly, what about bonus pay? Suppose the bonus is expected, and you give it to a nonexempt/hourly employee. In that case, your payroll must recalculate the hourly rate for the week it was paid. If you have an incentive for perfect attendance in one month, your payroll must recalculate each employee’s hourly rate with the included incentive.
The easiest bonuses to give with the least possible DOL consequences are spot bonuses, hiring referral bonuses, sign-on bonuses, and holiday bonuses. Bonuses come in two forms.
They are Discretionary Bonuses, given at the employer’s discretion; the amount and timing are not predetermined or guaranteed, and they will avoid most DOL concerns.
The Non-Discretionary Bonus is tied to specific, pre-defined criteria, such as meeting sales targets or achieving program goals, and the employees know these bonuses will be given to them, unless there is an unforeseen circumstance. I occasionally hear that people have left or been RIF’d before a bonus like this is due to them. Then, you could have the DOL and the Equal Employment Opportunity Commission (EEOC) at your doorstep.
Michele Harmon
“Your employees are the heart of your organization.” Dr. Michele Harmon is a Human Resource professional, supporting clients in Texas and New Mexico that range in size from five to more than 3,000 employees. Email: micheleharmon1@gmail.com