How to Handle the End-of-Year Bonus

It’s that time of year again! End-of-year bonuses are approaching quickly, and we are here to help you handle them correctly.

In times where hiring and retention remain difficult, it feels as important as ever to show appreciation to the employees who have stuck with you by putting some extra cash in their pockets this holiday season.

At the same time, many business owners are questioning whether bonuses are financially responsible, or even feasible.. So, what should you do if you are unsure whether you should give a bonus at the end of 2022? Here are some suggestions:


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Make sure your end-of-year bonus is a discretionary bonus.

First, let’s be clear about exactly what we mean when we say that end-of-year bonuses should be “discretionary.”

A discretionary bonus is not tied to a specific set of performance goals (like a production-based bonus) and it is not promised or guaranteed in any way. Instead, the employer has complete discretion over whether or not to provide a bonus, as well as how much of a bonus they want to provide.

If you are unsure whether your end-of-year bonus is discretionary, you can refer to this DOL fact sheet.

The reason this distinction is so important is that non-discretionary bonuses are considered earned wages under state and federal law. Non-discretionary bonuses are also subject to overtime requirements as part of the employee’s base rate of pay. So, if your end-of-year bonus is actually a non-discretionary bonus, then you are legally required to pay it.

But, if your end-of-year bonus is discretionary, as most are, then you have some options.


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Provide an end-of-year bonus, if at all possible. 

In our experience working with thousands of small businesses across the country, we have found that the overwhelming majority of businesses are providing some kind of bonus, even if they have to hunt for the money to do it.

Having said this, the first step is to work with your accountant to make a sound financial business decision about what, if any, resources you have to put towards a bonus.

We are seeing that many business owners who are struggling still want to give to their employees, as they know that their employees are struggling as well.

Some members of our community are “digging deep” to find the funds by cashing in credit card and hotel points for either cash or gift cards to provide to their teams. Others are taking a close look at their yearly budget and reallocating funds.

If at all possible, we encourage you to provide a bonus, even if it is less than you would normally give. As you are likely aware, even when they are discretionary, end-of-year bonuses frequently become expected by employees, so canceling them could have a significant impact on team morale.

So, do what you can, even if it’s not what you wish you could do.


Communicate with your employees.

As always, communication is key.

Regardless of the amount you are able to provide, make sure that you also tell your employees how appreciated they are. While the amount of the bonus is significant to employees, this is a situation where the thought really does count. So, don’t hold back when it comes to highlighting the performance and accomplishments of individuals and the team.

If your business had a difficult year financially, your employees likely know. Even so, explain the situation to them and reassure them that the reduced or non-existent bonus is not due to a lack of desire to show your appreciation for their hard work. It may even help to provide them with some numbers comparing this year to previous ones to make sure they have a complete understanding of your decision-making process. Remember, communication is key and is always appreciated between you and your employees.


Get creative.

If you find that you really can’t provide a bonus, then it’s time to get creative. Even if you can’t afford individual bonuses, we highly recommend finding an alternative way to show your appreciation.

Here are some creative ideas from our CEDR community:

  • Bring in a free catered lunch each day for a week.
  • Offer bonus vacation days. This could mean making days you are closing around holidays paid instead of unpaid, or giving your team extra paid time off in 2023.
  • Give a series of smaller bonuses spread out over time to align with your finances.
  • Create a temporary or ongoing performance based bonus. This is also a great way to be clear about where the business needs to improve right now. Give your team a production/collections goal to hit, and a defined bonus if those numbers are met.

Again, communicate to your team so they understand the situation. This is particularly important if you typically give a large bonus that employees may be expecting when making decisions about their own holiday shopping and other financial decisions.


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Be careful of the optics.

Make sure you mean it when you say you can’t afford a bonus, as your employees will be highly sensitive to, and observant of, your personal activities and expenses if this is the case. If you cancel the end-of-year bonus and then buy yourself an expensive new car or go on an extravagant vacation, expect there to be backlash.

Again, communication and transparency are your friends here. If you show up to the office with a “new” car but it’s because your lease ran out and you had to replace it, tell them that so they don’t think you just had cash sitting around to buy yourself a new BMW.



Most employers want to show their team appreciation for working through the year despite staffing problems. Everyone has probably had to put in more work than they are used to, and for that, employers want to show their appreciation as best as they can.

Though it may not be what you’ve been able to do in previous years, if you traditionally offer an end-of-year bonus, you’ll want to do what you can to keep that tradition going, even if it means getting creative in order to do so.

If you are still able to provide a bonus, make sure you offer it on a “discretionary” basis so that you aren’t legally obligated to pay the bonus. Discretionary bonuses also don’t have to be included in overtime calculations.

If your current financial situation is threatening your ability to provide a bonus this year, communicate that to your team, but be honest about the circumstances. If you claim not to have the funds to provide a bonus to your team and then proceed to buy yourself a new car or go on an expensive vacation, you can expect backlash from your team.

Still, you should expect your employees to understand if you are, in fact, facing a financial hardship that will compromise your traditional end-of-year bonus. And, if this is the case, remember that making an effort to acknowledge your team and show appreciation for their hard work can go a long way.

The question of whether or not you are able to offer an end-of-year bonus to your team ultimately comes down to your business’ available financial resources. Work with your CPA to see what you have available to offer your employees.

If you find you are able to provide some sort of financial (or other) reward for your team this year, you should make a sincere effort to do so — more often than not, keeping morale high during these difficult times will prove to be a great investment in your team and your business, in general.


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This post authored by CEDR Compliance Officer Nora Gustafson.

Dec 7, 2022

Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance based on applicable local, state and/or federal U.S. employment law that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.

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