A few years back, I joined my ex-girlfriend on a wonderful trip to New York, all expenses paid by her former employer. The trip was full of wonderful meals, a complimentary hotel room at the Waldorf Astoria, and a gold watch in a basket full of goodies. She was happy…until she got a tax bill from the IRS for the items.
Bonuses can be wonderful. But sometimes they can cause legal and tax headaches for both the employee and the employer. Employers usually pay two types of bonuses One type is a non-discretionary and the other is discretionary. Discretionary bonuses are usually paid as a gift for past services. They are unrelated to an employee’s work performance, and/or hours worked. For example, an employer may offer to pay an employee a holiday bonus or special occasion bonus. Non-discretionary bonuses are bonuses that are intended to incentivize an employee to work better and harder. They increase an employee’s performance and efforts. For example, a non-discretionary bonus might be based on an employee’s work performance efficiency and quality, attendance, years of service, and bonuses promised to employees at time of hire.
Bonuses might be either “earned” or “unearned.” For example a bonus might be earned by an employee if the employee works a certain number of hours, if they hit certain sales targets, or achieve other milestones. Other bonuses might be based on bringing in a specific amount of new business, or in some cases on whether the company making a profit. An employer must pay these bonuses if the employee meets the target.
A voluntary bonus, also known as a “discretionary” bonus, is one that the employer pays as a gift. A discretionary bonus provided to an employee is just a gift. If the bonus is not paid, the employee may not usually due because the employer can decide it just does not want to pay it.
Whether a bonus is voluntary or non-discretionary depends on the facts of each particular case. Discretionary and non-discretionary bonuses are both considered “wages” under California Labor Code. If the bonus is not timely paid, then the employer must pay it on time. If it does not, then the employer might be held liable for damages and penalties under the Labor Code. (See Labor code Section 204). What this means is that the bonus must be paid on the payday that applies to that pay period. Another interesting issue is calculating how a bonus might affect the rate at which overtime is paid. Further, all cash bonuses are taxed as well and most non-cash bonuses should be taxed based on the value of the bonus. the gift basket my girlfriend received is an example of a non-cash bonus that was subject to taxation.
If you earned a bonus, but didn’t receive it, please call me at (415) 391-9476.