Follow these best practices to keep your employees AND your medical practice happy!
The holidays are a perfect time to express gratitude for what your employees have done throughout the year, but they also prompt some very valid questions:
- Can my practice afford to give bonus?
- What form should the bonus take and what are the tax implications?
- How much should be given to each employee?
Can my Practice Afford to Give a Bonus?
It all starts with this question, right? Holiday bonuses are generally awarded before the year ends to be included in the current year’s expenses. It starts with going through your budget and getting a clear idea of what you can afford. If you don’t prepare a budget for the practice, then consider these two financial items to determine if your practice can afford a holiday bonus.
Checking account balance – does your practice have enough cash on hand to cover two to three months of total expenses? This is the first test. If so, keep reading…
Practice profit – if your practice produces between $1-$5 million in collections each year, your annual profit should be at or above 10%. Take a few minutes to review your practice’s Profit & Loss Statement. If your YTD profit is over 10% AND you have 2-3 months of cash on hand, then you can afford to pay a holiday bonus.
What form should the bonus take and what are the tax implications?
Holiday bonuses can range from a company-specific gift to an extra day off, or a monetary award given around year-end.
Many types of bonuses are considered taxable by the IRS. For example, cash, a gift certificate, gift card, and similar items that can easily be exchanged for cash are typically considered taxable wages, regardless of the amount (see IRS Publication 15-B). If you give employees holiday bonuses, any monetary bonus, whether paid out via paper check or direct deposit, it must be reported on an employee’s W-2 form as taxable income
Remember also that giving an hourly employee paid time off has the same tax consequences as if the employee was on the job during that time, meaning that the pay is reportable and taxable. Some employers opt to pay both the holiday bonus amount and the tax amount.
However, if your practice gives a turkey, ham, or other item of nominal value for the holidays, it’s generally not considered taxable income.
How much should be given to each employee?
While a year-end, review-based bonus often varies by years of service, base salary, and of course job performance, a holiday bonus rarely does. In most cases, holiday bonuses are a flat-rate amount (or physical gift) provided across all employees. The amounts vary widely among medical practices, but a common range is between $250 and $750.
Although less common, some practices award holiday bonus based on some percentage of salary, with 1 week’s salary being the most common.
Regardless of your approach, awarding a holiday bonus separate from your employees’ performance-based rewards is a powerful way to show your appreciation!
If you have questions related to whether you can afford to pay holiday bonuses this year, or how much is appropriate for your unique situation, feel free to give us a call for a free consultation by calling us at 844-424-9637 or completing the short form below.
Want to learn more?
Request Your Free Consultation