Reprinted with permission from HomeWork Solutions, www.4nannytaxes.com.
In the household staffing arena, it is very common for families to express their appreciation for valued service with an end of year monetary bonus. Household employers often have the following questions:
- Is the nanny’s yearend bonus required?
A bonus is NEVER required – it is a gift. However, because they are so common industry wide around the winter holidays, failing to express any recognition of a job well done may communicate a lack of appreciation to your household staff. It can be an unintended consequence. If you are unable or unwilling to offer a cash bonus, a written note expressing your appreciation for the staff’s role in your household, along with a modest gift card, can help you avoid hurt feelings.
- What kind of bonus is most common?
CASH is by far the most preferred bonus by staff. Gift cards are also very common, especially when the employer is confident that the nanny, housekeeper, house manager, etc. actually does shop at the particular store.
- How much do families give?
We most commonly see permanent staff paid 1 week’s regular payroll as the cash bonus – occasionally 2 weeks, especially for long term employees. For staff who have not been with the family a full year, one day’s pay for every month of service is a common calculation. Many bonuses are larger or smaller – these are just typical calculations.
- So cash bonuses are not taxed as payroll, right?
All bonuses are taxable income to the employee. They must be reported as such on all employment tax documents, including Form W-2 at year end. In the eyes of the IRS, there is no such thing as a GIFT between an employer and an employee. Anything of monetary value given by an employer to an employee is considered compensation, subject to wage reporting and employment and income taxes.
Remember, there is no “one size fits all” approach to the nanny yearend bonus; there are as many creative ways to approach this as there are nanny employers. Written words of appreciation are always in style!