Want to Give Your Team a Holiday Bonus? Beware of Payroll Tax Risks
October 25, 2022
At a glance
- The main takeaway: Many dental practice owners offer cash or checks to their employees during the holiday season yet are unaware of the payroll tax risks that come with those gifts.
- Impact on your practice: Plan proactively to ensure your cash bonuses are incorporated into your payroll system or explore alternative gift options to comply with tax regulations.
- Next steps: Aprio’s National Dental Practice can help you navigate payroll complexities and make sure you aren’t subjected to unnecessary risk or tax.
The full story:
The holiday season is right around the corner, and like many business owners, you may be thinking about ways to reward your employees for a job well done.
Many dental practice owners ceremoniously gift their employees a check or cash at the end of the year so they can spend their bonus earnings as they wish. But if you’re thinking about following suit, you should pause before you hand over the envelope. Why?
Cash bonuses can cause payroll headaches
Many business owners forget or simply don’t realize that they have to run all bonus payments through their payroll systems. That’s right: bonuses are subject to payroll taxes like federal unemployment tax and state taxes, among others. Your payroll provider must be aware of the bonuses you’re paying out to employees so they can properly run them through your typical process (for instance, they could run the bonuses through direct deposit like regular payroll).
Failing to account for bonuses in your payroll system could put your dental practice at risk — especially if and when your practice is subject to an audit. If your cash bonuses show up unaccounted for in an audit, the state or federal government could argue that those earnings were, in fact, wages and your practice would need to pay the original payroll tax for the bonuses, plus interest and penalties. Those costs can add up quickly, especially if you have years’ worth of cash bonuses that you forgot to include in your payroll.
Alternative bonus options
One of the best ways to avoid payroll tax risk with year-end bonuses is to explore other avenues for rewarding your team. You may consider gifting your employees with experiences versus cash at the end of the year. These gifts may include a group trip to a fun location, an interactive cooking class or a wine tasting capped off with a special holiday dinner. None of these gifts would be subject to payroll tax. Plus, they serve the dual purpose of engaging your employees in a team-centric activity to build camaraderie and properly celebrate the end of the year (an added perk is that these experiences are business-deductible).
Another idea is to gift your employees with extra vacation days versus a tangible item. You could give your employees the option to apply their extra days to holiday time off or encourage them to use the days at their leisure. Not only will you comply with the required tax regulations, but you will likely boost morale, loyalty and trust among your employees, which in turn benefits retention.
The bottom line
If you still prefer to give your employees cash or a check at the end of the year, it’s important to build those amounts into your practice’s financials and communicate proactively with your payroll provider so that you aren’t opening up your practice to audit risk. At Aprio, we work closely with dental practice owners to help them navigate payroll complexities and make sure they aren’t subjecting themselves to unnecessary taxes.
If you are planning your holiday bonuses and would like specialized payroll advice, schedule a free consultation with our team today.