The holiday bonus can feel a bit like a double-edged sword for employers: if you give away too little, your employees might not be happy with you. If you give too much, you won’t have quite as much left over to invest back into the company that keeps them all employed.

It seems like a simple enough topic. Then you start getting into more serious questions. How does it differentiate from the year-end individual performance bonus? What are the valid alternatives if your company simply doesn’t have extra money to spend on bonuses?

And, finally, is there a happy medium, or a single system you can use to determine 1) how to give the “right” amount in bonuses and 2) how to go about it the right way? Here are our thoughts on making the holiday bonus experience work for everyone:

Tips on Giving Out Holiday Bonuses

How do you give out a holiday bonus? It starts with poring through your budget and getting a clear idea of what you can afford. But first, let’s get clear about what a holiday bonus is:

“A holiday bonus can generally be described as a gift expressing gratitude, which is given equally to everyone,” writes PayChex.com.

That means that your holiday bonus comes low on the list of priorities—if the other priorities on that list include making payroll, paying great benefits, and giving out performance-based raises to employees. Still, the holidays are a perfect time to express your gratitude for what employees have done throughout the year.

How to Determine How Much to Give, and How to Give It

Since it’s already the holiday season, it can seem too late to reward the hard work of the employees you’ve kept on staff all year.

• Giving cash bonuses? Give out as much as you can afford to give to everyone. Once you start weighing holiday bonuses based on performance, you’ve stopped giving holiday bonuses. Now you’re simply adding to the performance-based raises you’ve already instituted throughout the year. Your holiday gift should be equal for everyone, but some employers do give percentage-based bonuses to their employees.
• Time it before the holidays. The holidays are a time in which many Americans’ spending is at its highest. If you’re giving out a cash payment in your bonuses, keep this in mind—the end of the year makes for a natural point to give out bonuses, but give people some breathing room to help with holiday shopping.
• Add the bonus to a paycheck. Cash bonuses can often be the easiest way to give bonuses for tax purposes, as it will fit neatly onto any employee’s W-2. And you’re not making it any harder for employees, as other gifts (like gift cards) would be considered taxable by the IRS.

Alternatives to Holiday Cash Bonuses

Let’s be honest: everyone’s favorite bonus from their place of employment is the gift of cash. But as it turns out, only about 38% of small businesses are able to give out cash bonuses every year. It’s great when you can do it, but it’s not always required. And if you can give bonuses like that to employees who deserve it, that should be your first priority.

But it doesn’t mean you can’t spread a little holiday cheer if your company is stretching the budget thin as it is.

Here are some alternatives to cash that employers like to use:

• PTO. Paid time off is not only appreciated during the holidays—it’s the second best thing to getting a fatter paycheck. Essentially, it’s the same thing. If your payroll is based on salary, you can give away holiday “bonuses” in the form of extra time off, and it’s one of the most popular perks outside of a direct check.
• Giftcards. If your company meets all of its financial obligations and provides its employees with great benefits, they’ll usually understand if you can’t afford the bonus amount. A gift card alternative can be a good way to show appreciation during the holidays without the financial requirements typically associated with cash bonuses.
• Company swag. If your budget is stretched to the max and you still don’t want to give your employees nothing, some free gifts are always welcome. Company swag often comes at favorable prices when you buy in bulk, which makes it a great way to stretch the dollar while still giving your employees a gift for the holidays.
• Holiday party. You’d be surprised at how much a holiday party can do to lift the spirits of people within a small business. In lieu of a Christmas bonus, a fun party can give people a chance to relax and kick back.

Budgeting for Holiday Bonuses

It’s that time of year, which means that you also have to be thinking about budgeting and year-end tax implications. Should you do a flat dollar amount? What did you do last year? What will make life easier for you in the new year?

These are all considerations you need to pay attention to during bonus season. And employees bonuses need to fit into accounting principles whether you’re doing flat dollar amounts or simply offering gifts to employees.

How do you prepare your budget? No two businesses are the same. But keep in mind that cash bonuses will show up on the balance sheet as income paid toward your employees, which needs to be taken into account.

If you can, spread the saving you do for holiday bonuses throughout the whole year. This makes the impact far less dramatic a drain on your cash flow, minimally disrupting your company on a month-to-month basis. But if it’s already too late for that, look at your cash on hand, the liabilities that require payment in the next three months, and what you expect your next tax bill to be. You have to prioritize meeting your financial obligations first, as fun as it can be to give out holiday bonuses.

A great holiday bonus is always a great way to cap off the year. But it’s important that you approach it the right way and find a way to give your employees a kind gesture for all of their hard work—big budget or not.