4 Things You Need to Know About Your Holiday Bonus — Besides What You're Going to Buy

What Is a Holiday Bonus?

Holiday bonuses are extra sums of money companies give their employees at the end of the year. Some businesses give out bonuses based on individual employee performance. Other businesses give bonuses based on the percentage of individual employee salaries, and others give a flat dollar amount to all employees regardless of their salary. 

How much is the average bonus?

Why Don’t Employers Give Bonuses?

Holiday Bonuses and Taxes

Though receiving large chunk of cash from your employer may feel like a gift, legally, it’s just another form of income that the government can tax, so if you receive a bonus of $1,500, don’t make plans to spend all $1,500 just yet. The following tax rates apply to bonuses you earn:

• Social Security Tax: If you haven’t earned $127,200 of income this year, your employer will deduct 6.2 percent of your bonus for Social Security.
• Medicare Tax: All compensation is taxed for Medicare, so expect to have 1.45 percent deducted for this tax.
• State Income Tax: This amount varies by state, so check into your local policy before making plans for your extra money. In New York, for example, you can expect to pay 4 to 8 percent, plus extra if you live within New York City limits. 
• Federal Income Tax: This tax is slightly more tricky than the other forms of taxation. The IRS usually requires 25 percent to be held from supplemental income including bonuses, but your company has the option to combine your bonus with your regular paycheck, which will typically result in a higher amount of money being withheld. If this happens, it may work out in your favor: tax rates on supplemental income may be higher than your tax rate based on total income when you file at tax time, so you may get some of the money that’s withheld back as part of your federal refund.
• Retirement plan contributions: If you’ve opted to have your employer withhold part of your check to contribute to a retirement plan, chances are that the same percentage will be held from your bonus and contributed to your plan. Though withholding money from your bonus will give you less money to enjoy up front, it will help provide an even larger nest egg when the time for retirement rolls around.

Higher Salary or Bonus? Which is better?

If you have the option of taking a higher salary or a holiday bonus, there are pros and cons to choosing either option. Companies typically benefit more from giving employees bonuses more so than salary raises since a bonus is only guaranteed one time, so there is less commitment involved. 

Another benefit for employers is that giving out performance-based bonuses can encourage employees to stay motivated and do their best work. One con for employers who give out bonuses is that employees can come to regularly expect holiday bonuses, and they can feel dissatisfied if a company has an off year that leads them to provide smaller bonuses or no bonuses at all. 

For employees, earning an extra lump sum can be a nice way to add to savings since it is easier to separate it from your regular paycheck. Receiving a bonus can help provide nice gifts for the holiday, but earning a higher salary can have better rewards in the future. One drawback to receiving a bonus instead of a salary bump is that the amount isn’t included when factoring in the amount for pension or unemployment totals. 

If you receive a bonus related to your performance, it could pay off during your next performance evaluation when you have the chance to bring up accomplishments. Being able to demonstrate that your hard work earned a tangible reward could help you negotiate a higher salary down the road.

More About Bonuses

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Kayla Heisler is an essayist and Pushcart Prize-nominated poet. She is a contributing writer for Color My Bubble. Her work appears in New York's Best Emerging Poets anthology.