Our Christmas party is coming up and I want to give each person a few hundred dollars in cash. Looking at last year, the cash was categorizes as part of our travel and entertainment expense as a "company event". What is the best way to account for this?
Christmas Cash
Answers
Hey CEO. Take it from a
Cash is the absolute worst case to try and slid out as a
So, all you are really doing, and how you should be booking this is giving them a "Christmas Bonus". And yes, the organization will be hit with employer taxes and benefits costs on that bonus. And, you are expected to apply proper withholding.
It seems like every time I turn around, some well meaning but misguided executive where I work is trying to "gift" items to employees while retaining the expense deduction for income tax purposes for the organization.
Personally, I think this is bad from more than the tax liability standpoint. I've seen more than a few monsters created this way. IMHO, giving a YE bonus is a nice gesture. But don't personalize it as a "gift". It inflates people's expectations and opens up all sorts of liability issues down the road.
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I am reading these comments with a decree of amusement, as there are procedures even for giving the proverbial "envelope" with cash in it. If this is what this CEO wants to do he should gross it up, have the company absorb the expense and make everybody happy most of all himself. However, in any company of any size to disburse cash without proper supporting receipts and documentation is a very bad idea. To do so and slot the expense into some other tax deductible account is definitely operating in the grey area.
Managing Partner:
You are right. There are procedures for this. They are spelled out in IRS Pub 17 for one time payments.
If by "company absorbing the expense" you mean pay the required fed and state tax withholding for the employee, you are getting really complicated. That means their tax withholding becomes taxable income as well.
My company has a policy of paying the employee share of a state mandated disability tax. This blows up most payroll programs and requires special handling. KISS is the better approach. I've suggested several times that we eliminate this "benefit" and increase every employee's salary by 1% to cover the "loss". This is the smarter way.
Yes, I agree it's all too complicated. Which is the reason I'd recommend sticking with a separate net check for a the gross amount of bonus determined for each employee at year end processed through payroll. Everyone wins.
Alternatively, go smaller, use cash and call it de minimis fringe benefit. The IRS has never determined a specific threshold although tax experts generally agree that $25 max per year is about right. I'd be willing to attempt a C-note if it's a once a year shot without losing sleep. But nothing more. Again, everyone wins.
I'd still caution that, in my own experience, this can backfire with low level employees. I've had them stand in my office door and scream at me when we grossed up pay a bit to cover such programs and their next paycheck was $25 less due to tax withholding. Of course, these were the same employees that begged me to stop contributing to their 401(k) plans because "they were only losing money" and it "seemed like a waste".
You can lead a horse to water, but you can't make them drink!
Agree with everything Anonymous CFO noted. I just have to add that it is quite nice that you have given and wish to continue giving your staff a Christmas bonus - hopefully the tax/
Thanks Ken and anonymous CFO ...
I'm good with doing the right thing. If taxable income is the right thing to do, I am all of that.
My question now is how to "do the right thing" and process the transactions to we end up with say $200 cash in an envelope?
Kevin
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I might be late to the party and what most have said is correct. The easiest way to do this is to take the bonus and divide by .9235. This will give you a new gross and withhold SS/Med only. A $100 net bonus calculates out to $108.28 in Gross pay. The employer will pay both sides in this equation. If it is more than say a couple hundred dollars, I would calculate in federal and state withholding by adjusting the divisor.
Kevin,
I'm pretty sure your accounting/payroll person can come up with a way to plug it into the payroll system so that all the taxes get calculated and withheld while it's processed outside the payroll (meaning not paid via payroll).
This sort of thing is usually associated with a pay type field. Might even be one in there already called "In Kind Benefits" or "Benefits In Kind". As Anon CFO mentioned, it isn't even cash but any sort of consideration not exempted that is supposed to be assessed for tax (gift cards, trip awards, prizes for salespersons, etc.).
Good luck and Happy Holidays!
Ken
AGAIN, great and wonderful to share the profits with your employees. I’m sure they will appreciate it no matter what! As to trying to round the figures that would require your payroll person estimate everyone’s tax (single, married, and then what level of the state % plus any contributions) and would be very messy unless you have 20 people or less. Not to give you a head ache – but that would also require you to vary the amounts based on the marital status. The guy marking single and zero on his W4 would have to be paid more than the mother of 4 marking married and 4 exemptions. Does that seem like an equal distribution?
I will give you a tip, though, to make up for the hassle: Run a separate payroll check for the bonuses. The staff will want to see the extra check or deposit and recognize the gesture. If you add it to the last paycheck of the year it gets absorbed and often over looked.
The way we have handled it in the past is to gross the payment up for the taxes to net to a $200.00 payment to the employee. The payroll software typically can do this for you automatically, however, in case it can't you manually plug the amounts. this does get complicated for some people since some might be over the FICA limit or be subject to the 0.9% Medicare extra tax.
If you just have a few to do, I would suggest a paycheck calculator like:
http://www.paycheckcity.com
Your payroll person should be involved early on so that there is time to get it in the 2013 records and W-2.
Good luck!
Well the Christmas party was Saturday. And I gave out the cash vs. a payroll run. Now I need to live deal with the consequences. I am thinking about adding a $200 advance (like a travel advance). to each employee. (We have 12 employees) Then add a $200 bonus to the year end paycheck. Wish me luck!
I have this specific problem with our employees every year. The goal for my CEO was to make sure cash was actually handed out at the Christmas party. This left me with the issue of making sure it was recorded properly. No matter what it makes things somewhat complicated. I have gotten into the habit of releasing the cash but then recording a year-to-date entry before the end of the calender year on the payroll. It makes the taxes on the next payroll a bit higher, but it gives my CEO the opportunity to be able to personally hand out the gift rather than just having it processed on their paycheck. I suppose their are positives and negatives to both options.
After reading all of these comments one can't help but to think how disgusting has this country become that a nice little gesture can't be made to hard working employees without such a hassle. We have become indentured servants to the government.
I have to deal with this every year as my CEO wants to give company checks to employees with the full amount of the bonus that he has decided on for each employee...without taxes withheld. We'll do this around mid-December and then on the last payroll of the year I add the bonus amount to the employee's gross wages so it can be taxed and then back it out after taxes. As long as the employees know that this is going to happen it's not such a shock when they see their final paycheck for the year.
To give everyone a net bonus of $200.00, I just gross up only the soc. sec. by 6.2% & the medicare by 1.45%. This year, with the additional .09% medicare for over $200,000, you would need to add this to those specific employees. Keep it simple, Silly... the individual tax withholding for each employee is not your concern. Doing it this way, keeps the next & gross the same for all employees.
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To add to Kay's perfectly KISS scenario, $200 isn't going to change anyone's taxes all that much, even one that is at minimum wage. Most people over withhold (a silly mistake that people can't seem to stop themselves from loaning money to our government interest free). So, they will get a slightly smaller refund.
By the way Merry Merry :)
Bottom line, the $200 bonus cost the company $300 (incl 50% tax gross-up)...Happy Holidays!
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