If you plan to give your employees a Christmas bonus, be sure you know the tax implications for both your business and your employees before writing out those checks.

First, you must remember that bonuses are taxable income, and you must withhold state and federal taxes, Medicare, Social Security and unemployment.  Second, you as the employer have to treat the check as a paycheck.

It is not uncommon for employees to want more of their bonus up front; you can offer them the opportunity to update their Form W4 for that specific paycheck and then revert back to their original withholding for subsequent checks.  They will still pay taxes on the income.

As long as the proper tax laws are adhered to, bonuses are tax deductible.  If you have or expect to make a profit this year, giving your employees a bonus is advisable before the end of the year.  It’s a deduction for you and it reminds your employees that you appreciate their yearlong effort.