Don’t confuse Uncle Sam with Santa Claus. When it comes to violating pay laws around the holidays, the feds won’t be generous if your organization is on the naughty list.
Here are four rules to make sure holiday pay complies with the Fair Labor Standards Act () and IRS rules.
Rule #1: Eight hours is the basis. Just as the FLSA doesn’t mandate that you offer paid holidays, it also doesn’t specify how you should calculate pay if you decide to offer the benefit. That means you have lots of latitude.
For example, even if your nonexempt employees usually work 10-hour days, you can pay them for eight holiday hours.
Rule #2: Holiday pay doesn’t count toward overtime. If you do pay for unworked holidays, and employees work additional hours that week, don’t factor the holiday pay into their regular rates as you calculate overtime pay.
For example, if you offer eight hours of holiday pay and employees also work four 10-hour days, you don’t have to pay OT.
Holiday pay for exempt employees is trickier, since exempts generally must be paid their full salaries for any week in which they do any work.
Rule #3: You can mandate time off. If you close for a holiday, and you have a bona fide, exempts can be required to take those days off, provided they continue to receive their guaranteed salary.
Note: You must pay full salaries to every exempt who performs any work during a workweek, even those who may have run out of accrued leave or who have negative balances in their leave banks.
Rule #4: You don’t need to pay exempts who don’t do any work during a workweek. Thus, if you shut down for the entire week between Christmas and New Year’s, you needn’t pay exempts anything. They may use vacation or other accrued time, if they have it.
How to handle holiday bonuses
If you pay holiday bonuses, keep in mind that the IRS always considers them to be taxable income. That means you must withhold both income taxes and FICA taxes. But how bonuses are paid and taxed—in separate checks or combined with regular pay in one check—is up to you.
Rule: Provided you withhold income taxes from employees’ regular pay, you may pay bonuses in separate checks and withhold income taxes at the flat 25% supplemental withholding rate.
Naturally, that’s going to reduce the amount of the bonus employees can actually spend. What can you do to ensure your employees receive the full bonus amount? Gross-up the bonus to cover the income and FICA taxes due.
Let’s say you want your employees to pocket a full $500 bonus. To gross-up, subtract the flat 25% income tax withholding rate and the employee FICA tax rate from 1:
$500 ÷ (1 – 0.25 – 0.0565) = $720.98
The bonus amount would be $720.98. You would withhold $220.98 in income and FICA taxes, leaving the employee a take-home bonus amount of $500.