Your Guide to Bonuses

When you'll get it, what it'll look like, and how it'll be taxed.

Published: Dec 13, 2018

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Pop quiz: what's a signal that you're working at a successful organization?

If you're paid a bonus. According to a PayScale survey, 79% of top-performing firms provide a bonus, which is nine percentage points higher than what occurs at average organizations. It's what good managers do if revenues grow-reward their employees.

One survey found 79% of top-performing firms give bonuses.

But even if your company isn't in stellar territory, there's still a good chance you have more of your income coming via these spot boosts. The United States Department of Labor found that 2.8% of yearly income now comes from variable pay, the highest mark since it began tracking bonuses a decade ago. One reason that bonuses have increased as a percentage of pay is, ironically, due to the stagnation in salaries. With that in mind, it's important to understand the different ways these influxes of cash are doled out and taxed.

Know thy structure.

Broadly speaking, there are two most common structures for bonuses: those based on discretion and those that have a measurable scorecard attached. A $100,000 target bonus that's purely discretionary, for example, is very different from a $100,000 bonus target and a formulaic scorecard attached with a $200,000 upside and a $50,000 downside, says Korn Ferry senior principal Tony Wu. "That's sending a different message," Wu says. "Candidates need to understand the mechanics behind how some of these incentive programs work."

In addition, the traditional year-end payments are increasingly becoming varied. The number of companies that provide yearly bonuses has dropped from 67% in 2016 to 56% today, according to PayScale. Meanwhile, the number of organizations that offer a monthly bump has doubled to 10%, while those that have quarterly bonuses has grown to 17% from 13% two years ago. These more timely bonuses are "more effective for motivating employees than an end-of-year bonus requiring employees to wait many months to receive it," says Lydia Frank, VP of content strategy at PayScale. She adds that more companies are shifting bonuses to the "cadence" of the individual business. If you work in technology, for example, and a large project finishes, test the waters for a bonus, since managers will be looking to keep employees motivated for the next big initiative.

The tax man cometh.

Collective groans aside, your company will withhold 22% (37% when it surpasses $1 million) of your bonus to send to Uncle Sam. But since bonuses count as regular income, you can add the extra money to your income line on the tax form. If you're in a tax bracket that's higher than 22%-meaning you make more than $82,500 for single filers or $165,000 for joint forms-you'll likely owe some money from the bonus. Which means you shouldn't necessarily be earmarking that extra $50,000 for a kitchen renovation or a new car.

Here's a tip from Rosalind Sutch, a CPA at Drucker & Scaccetti: if you're expecting a large bonus, pushing you into a higher tax bracket, estimate how much tax you'll pay this year on your salary, with the addition of a bonus that's on the low, medium and high range. If your company's withholding of the bonus and income taxes is less than what you estimate, then hold off spending some of the extra income to make up for the gap in taxes you'll owe.

Think about alternatives.

OK, so maybe your firm had a down year. Or you're in a job that doesn't provide bonuses. That doesn't mean your office may not be offering them in a different form. Candice, a digital communications staffer, loved her firm's spot bonuses, which came in the form of an Amazon gift card, usually in the $50 range, every few weeks. But she hadn't had a significant increase in pay beyond basic cost-of-living increases in four years. It wasn't until Candice, whose name has been changed, demanded to understand exactly what benchmarks she needed to reach for a promotion-instead of just incremental gift cards-that she finally got a significant raise. Other employees have asked for more paid vacation or telecommuting options as an alternative to bonuses.

When you land your next gig.

With wage stagnation making bonuses a more common part of compensation, it's important to ask about signing bonuses going forward; 67% of enterprises now offer such a financial incentive. So while you're wrangling over paid leave, 401(k) matches, and healthcare benefits, be sure to ask about a bonus for when you sign on the dotted line.

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