What is a holiday bonus? A complete guide for employers
During the holiday season, many employers look for ways to show appreciation for their employees—and a holiday bonus is often the go-to. Some organizations call it a Christmas bonus to align with December festivities, while others choose a more general year end bonus. Whatever the approach, these bonuses can lift morale, demonstrate gratitude, and round out a solid compensation package.
In this guide, we’ll break down everything HR leaders and employers need to know about holiday and Christmas bonuses, from tax implications to how much a Christmas bonus is, on average—plus best practices for awarding bonuses effectively.
What is a holiday bonus?
A holiday bonus is a special bonus or cash payout that employers give their employees around the holidays. Frequently referred to as a Christmas bonus, it usually arrives near the end of year, although timing can vary.
These payments may be discretionary bonuses—where the employer decides each year whether or not to offer them—or they can be part of employees’ existing contracts and salary structures, which means the end of year bonus is guaranteed. Many employers see a Christmas bonus as both a gesture of appreciation and an incentive to finish the year end strong.
3 benefits of employee holiday bonuses
Employee motivation and engagement
One big advantage of giving a Christmas bonus is boosting morale. When employees feel rewarded for their hard work—especially during a potentially hectic holiday season—their engagement and productivity often rise. This form of compensation can be a discretionary bonus that employers award at year end to recognize effort and dedication.
Talent attraction and retention
A generous Christmas bonus can help bring in new employees and keep current team members loyal. While some organizations also provide a separate retention bonus, combining holidays with an extra compensation perk can be a powerful incentive. Consistent bonuses signal that employers value their people, which naturally boosts retention and engagement.
Company culture
When employers set aside a Christmas bonus or other discretionary bonuses, it sends a clear message about the organization’s values. By investing in employees through gifts or cash awards, you strengthen a sense of employee appreciation. Even smaller bonuses can positively impact the work atmosphere, showing that leadership cares about building a supportive and collaborative team.
How do holiday bonuses work?
A holiday bonus is typically an end of year boost to an employee’s compensation, often arriving in December as a Christmas bonus. Some companies give it on other holidays, but most choose late in the calendar year to coincide with the typical western holiday season.
A holiday bonus is a recurring payment that appears on pay stubs separately from the employee’s regular pay. Bonuses paid may be tied to a percentage of a person’s salary or offered as a flat rate. Other factors—like length of service or overall morale—might influence how much bonuses usually are.
In some cases, holiday bonuses factor in overtime pay rates, especially for non exempt employees. However, with discretionary bonuses, employers don’t always have to adjust for overtime paid during the year unless there’s a specific federal law or state labor mandate. It’s essential for HR to clarify if overtime affects a bonus structure—particularly for non exempt employees whose rate of pay must be handled precisely for compliance reasons.
Types of holiday bonus
Non-cash gifts
Some employers provide Christmas bonuses in forms other than cash. Non-cash gifts—such as gift cards, event tickets, or devices—can be just as effective. Non exempt employees often appreciate these bonuses if they hold real value, and they’re a good way to boost morale without changing overtime or rate of pay calculations. However, keep in mind these may be taxable by the IRS depending on the amount and relevant federal laws.
Cash bonus
A cash Christmas bonus is often the simplest option. Many employers use either a flat rate for all staff or tie the bonus to a percentage of each person’s salary. For non exempt employees, consider overtime calculations if the bonus isn’t a purely discretionary one. Also note that cash bonuses are typically subject to tax and might be taxed at a supplemental rate under certain IRS guidelines.
Office festivities
Not all Christmas bonuses involve cash or gifts. Some employers opt for holiday parties, special lunches, or team-building events. These perks count as discretionary bonuses when they’re not built into contracts or salary agreements. Celebrations can boost morale and act as a tangible reward for hard work during the year end push.
Extra paid time off
Another form a Christmas bonus can take is extra paid leave around the holiday period. Employees often appreciate additional days off to enjoy the holiday season without dipping into their usual vacation days. Still, employers should check their contracts and any labor regulations that apply, particularly concerning non exempt employees, to make sure everything is done by the book.
How much are holiday bonuses on average?
Some employers tie a Christmas bonus to an employee’s exact rate of pay, while others use a uniform flat rate. The best choice depends on your financial goals, contracts, and overall company performance.
Below are a few common ways employees might see their cash bonus calculated:
Salary percentage
Using a percentage of an annual salary is a popular approach. For example, if your average bonus percentage is 5% and an employee earns $50,000 a year, their Christmas bonus would be $2,500. This method ties the amount directly to the person’s rate of pay.
Flat bonus amount
Some employers give a fixed flat rate—for example, $500 or $1,000 as a Christmas bonus—to everyone. Higher-earning employees might find this less impactful than a percentage, but it can be easier for HR to manage, particularly if there are many non exempt employees with varying overtime considerations.
Business performance-based bonuses
Linking a Christmas bonus to company-wide success is another strategy. If the business exceeds its year end goals, employees might be awarded bonuses proportionate to the results. This can boost productivity, though discretionary bonuses will likely shrink if the year’s performance disappoints. Employers should spell out these terms clearly in contracts and communication with employees, so they aren’t surprised or disappointed when their bonuses fluctuate from year to year.
Employee performance-based bonuses
Some employers assign a Christmas bonus based on individual achievements. High-performing employees might receive a bigger bonus, while those not meeting targets could get a smaller amount. Just be sure to keep these discretionary bonuses consistent and factor in labor rules on overtime when awarding extra compensation to non exempt employees.
How to give holiday bonuses
Step 1. Assess your company's financial situation
Before rolling out a Christmas bonus or any other holiday bonus, employers must check financials, including the company’s projected end of year numbers. If you already offer retention bonuses or other types of compensation, consider how additional bonuses will affect total payments. Knowing your finances helps you pick a suitable amount or percentage to offer as holiday bonuses.
Step 2. Analyze industry benchmarks and standards
Next, look at what other employers provide in terms of a Christmas bonus. Comparing rate structures, your average bonus percentage, and other data will help guide you to a fair figure. Also, confirm if any federal law or local statute mandates minimum compensation. Compliance is key to avoiding penalties that can result in legal trouble and potentially costly fines.
Step 3. Determine employee eligibility and bonus structure
Once you’ve identified benchmarks, decide who qualifies for the Christmas bonus. Will you include part-timers and non exempt employees? Will you hand out discretionary bonuses for individuals working under specific contracts? Define award criteria clearly, and decide if you’ll use a flat rate, percentage, or performance-based plan. Clearly document your plan to help prevent misunderstandings and meet IRS and federal law requirements.
Are bonuses taxable?
In general, Christmas bonuses are considered supplemental wages and therefore taxable income under federal law. The IRS treats these bonuses paid as part of employees’ overall compensation, so standard tax withholding rules typically apply.
Different states also have their own income withholdings or brackets that could affect the final payment. Employers should consult HR or payroll experts to confirm their tax responsibilities—especially if other incentives, like retention bonuses, might push an employee’s income into different tax brackets.
Social security
All bonuses, including a Christmas bonus, are subject to Social Security taxes. For non exempt employees, withholdings also apply to additional pay for overtime. Employers must use the correct rate and deposit taxes as required by local, state, and federal law.
Retirement plan
If an employee has a 401(k) or another retirement plan, Christmas bonuses can sometimes be funneled into that account—provided the plan’s rules allow it. Employers should verify with their plan administrators to see how bonuses might fit into their contracts and whether special tax rules apply.
State income tax
Along with federal requirements, many states impose taxes on Christmas bonuses. Depending on your state’s approach to income tax, the supplemental wage rate or bracketed system can vary. Employers must follow the correct guidelines to withhold the right amount from each bonus.
Federal income tax
For federal income tax purposes, the IRS lets employers use either a specific supplemental rate or the aggregate method (combining the bonus and regular wages) when withholding for Christmas bonuses. Each way can result in different amounts withheld, so it’s best to check with HR or payroll professionals to make sure your organization stays compliant with contracts and labor laws.
3 holiday bonus best practices for employers
1. Refer to the bonus as a holiday bonus
Calling it a holiday bonus or Christmas bonus clarifies that it’s tied to the holidays and not part of other discretionary bonuses or a retention bonus. Be open about whether it’s meant to cover the end of year or is simply a festive holiday season gesture.
2. Distribute holiday bonuses equally
To promote fairness, many employers prefer giving Christmas bonuses in a consistent way—either by a flat rate or a percentage of salary. This can help avoid morale problems and ensures that all employees feel rewarded during the holiday period.
3. Explain the holiday bonus process
Clear communication is a must. Outline how the Christmas bonus is determined, who’s eligible, and whether it’s a discretionary part of your compensation or guaranteed for all (or some) employees. This openness helps both employers and employees remain on the same page about the bonus and see it as a true sign of appreciation.
Streamline holiday bonus payment with Rippling
Rippling makes bonus payments easy because it offers fully customizable payroll software that adapts to your business—not the other way around. With Rippling, you can create pay types for your exact needs, choosing from defaults that include common types like tips or bonuses, or customizing your own on a one-off or recurring basis. That’s not all—Rippling also allows you to run payroll off-cycle, as many times as you need, at no extra cost. And you can carefully control who can view, create, manage, and approve pay runs using any employee attribute, like department or role.
Rippling Payroll is intuitive, easy to use, and has a 100% error-free guarantee on every pay run. It also offers 600+ integrations, automatic and accurate tax registration and filing, and a dedicated mobile app where your employees can view their W-2s and paystubs, submit expenses directly, and more. With Rippling, you can:
- Pay employees and contractors in the same platform
- Manage time and attendance natively
- Run unlimited off-cycle pay runs at no extra cost
- Set up multiple pay schedules, pay rates, and pay types in just a few clicks
- Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose
- Automatically calculate prorated pay runs for new or promoted employees
- Manage all currency conversions, including payroll adjustments
- Automatically calculate overtime for every country
- Make changes after submitting payroll
Using natively-built payroll software, Rippling offers a seamless data pipeline that consolidates all your payroll functions on a single platform. Combined with Rippling’s suite of benefits management and time and attendance tools, it streamlines the entire payroll process.
Holiday bonus FAQs
Is $100 a good Christmas bonus?
It depends. For some employees, $100 might feel like a welcome gift, but in higher-paying industries, that amount may not boost morale much. Consider your budget, your overall bonus plan, and how it fits into broader compensation before deciding if $100 effectively conveys your appreciation for your team and their hard work throughout the year.
Do companies still do holiday bonuses?
Yes. Many employers still offer holiday or Christmas bonuses around year-end. Some might opt for retention bonuses or other incentives instead, but holiday bonuses remain a popular way to boost morale and show employees that their contributions are valued.
How is a bonus different from a commission?
A bonus—especially a discretionary payment tied to the year end or holiday season—is usually a one-time or occasional reward. A commission, on the other hand, is a structured part of the employee’s compensation based on their sales or production. A Christmas bonus often rewards overall or collective efforts, while commissions reward individual performance. Both can exist in an employee’s contract, but they serve different purposes in your pay structure.
This blog is based on information available to Rippling as of February 27, 2025.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
