Year-End Bonuses Could Affect Taxes

According to a study by CareerBuilder.com, about 45% of employers are planning to hand out year end bonuses.  If you were lucky enough to get one, there are a few things to be aware of before 2013 ends.

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RENO, Nev. According to a study by CareerBuilder.com, about 45% of employers are planning to hand out year end bonuses. If you were lucky enough to get one, there are a few things to be aware of before 2013 ends.

For Jessica Schneider, owner of several small businesses in the Midtown area, it was a good year. A successful business turned into two as she opened a children's store, Sippee's, across the street from her original business, Junkee's Clothing Exchange. She credits some of her success to the people she employs.

"I couldn't have done this on my own," she said. "We're a team."

Which is why she gives all of her employees year-end bonuses. She says even though as a small business owner it can be difficult to part with any profit, when she shares her gratitude, her employees work harder.

Year-end bonuses are a great way to let employees know their work is appreciated, but tax experts say bosses need to be aware of how much money their employees are withholding when deciding to give out bonuses.

"Throughout the year [employees] may be looking at their federal withholding's and say, "'Oh, I'm right about where I should be,'" Cathy Martin, Area Manager for Jackson Hewitt in Reno said. "Their holiday bonus may throw them into a higher tax bracket."

The bonuses small business owners like Schneider give away may not be throw employees into another tax bracket, but there is one thing to start thinking about if employers are hoping to give away bonuses in 2014.

"Your bonus could affect the credits you get through the Affordable Care Act," Martin said. "You may be at 350% of the poverty level throughout the year and getting your advanced credits. Then at the end of the year you get this big holiday bonus and suddenly you're over the 400%, you now get to pay back all of those credits the government paid for you."

Martin says if possible, it's better for employers to hand out bonuses in the middle of the year so employees have time to adjust withholding's on their taxes.

"But employers don't like to do that because they want to wait and see how much money they have left at the end of the year."

She also says many people forget other bonuses, like gift cards or other gifts with high monetary value, should also be claimed in your taxes.

"If you're given a gift card of say $25, you're suppose to claim that. The employer is generally going to take a deduction on their tax return and the IRS is going to look at that return and say, 'Okay, you're taking this deduction, where is it on the W-2's? Who is the employee you're giving it to?' If the employee doesn't claim it, that can be considered fraud."

Martin says most of the time, people don't realize they have to pay taxes on these gifts, so the penalty will generally be a fine.

If employers are worried about the tax repercussions of year-end bonuses, there are other ways to say thank you.

"Have a great big dinner at your house, play board games, write them a personal note, it will go a long way." Schneider said. "I think the most important thing about your job is to feel appreciated,"

Along with cash bonuses, Schneider organizes a team building night for her employees. This year, she rented a party bus and took her employees ice skating.

Martin says those sort of events are perfect for the employers who want to avoid having their employees pay more.

"A dinner or party is a good way to go because there's no tax consequences for the employee, but the employer can write it off as a benefit to the employees.


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