Yes, the IRS requires you, as an employer, to report every dollar of wages or income of any kind which you give to your employees. This is very important so the IRS can purchase more bath tub toy boats and Thomas the Tank Engine Rubber Wristbands for their managers meetings. (No this is not a joke, check out the 2013 Inspector General Report on the IRS and employee credit card expenditures.)
This year, because you took the time to read this update, you can eliminate the “net check” complaint on the Christmas bonus. Forget the idea of a company paid Christmas bonus and actually give a gift, from you as the owner. Under the tax laws, any individual can give another person a gift of up to $15,000.00 – TAX FREE. This means no withholding taxes or reporting to the IRS. Why, because it is a personal gift from you, not a company business expense.
Where do you get the money, as the owner, for these bonuses? There are several options. Many of us make loans to our own companies or have paid in additional capital to our company. This additional capital can be withdrawn or the principal amount of the loans repaid to you, without paying taxes on it. Over the years, you have most likely built up a pool of money on the books which you have already paid taxes on, sometimes called a Triple “A” account – that money can be used also. Lastly, take the money yourself as a paycheck or a dividend and pay any taxes personally. The key to remember is to give the gift yourself, not from the company.
Be creative with your gift: Have cash placed into a balloon; Freeze the money in a block of ice; or Have an overnight envelope delivered with the gift, to their home. Just do something different. Last year, I gave every employee a holiday traveler suitcase with cash inside, because each person was planning a vacation sometime during the year.
If you do not wish to give money there are other tax free options: Pay college tuition for the employee or a dependent; Pay a medical expense for the employee or a family member; Make a gift to their favorite charity, in their name. (Just make sure the money is paid by you directly to the school, medical professional or charity to insure that it remains exempt from taxes.)