During winter, many companies offer holiday bonuses to their employees. Bonuses are amounts of money your employer pays you that aren’t part of your salary agreement. Understanding holiday bonuses and how they differ from other types of bonuses your company offers can help you predict and plan for any money you may receive. In this article, we discuss how holiday bonuses work and how to determine the amount of money you may get from your bonus.
Recommended
What is a holiday bonus?
A holiday bonus is a sum of money your company can give you during the winter holiday season. Holiday bonuses are usually a set percentage of your annual salary, though some companies may add to your holiday bonus depending on your performance for the year. Employers often give holiday bonuses to an entire company rather than just individual members, although the amount of the bonus can vary.
How do holiday bonuses work?
Holiday bonuses are recurring financial bonuses that employers usually apply to employee pay in late December. Often, your employment contract outlines a bonus and your salary. You can receive holiday bonuses through multiple different methods, including an individual check, additions to your standard paycheck or pretaxed gift cards.
Why do companies provide holiday bonuses?
Companies provide holiday bonuses because they can encourage people to perform better at work. When bonuses rely on personal performance, employees may feel motivated to work harder. Employers can also grant holiday bonuses as a token of appreciation and to let employees know they appreciate their effort.
Related: How To Build Business Development Skills
Are holiday bonuses guaranteed?
Bonuses are “non-guaranteed compensation,” meaning your employer doesn’t have to give you one. Some companies may give you physical rewards such as gift cards or presents instead of issuing a holiday bonus. They may also decide to donate to a charitable cause instead of giving bonuses to their staff. Some companies include holiday bonuses as part of their contracts. If your employment contract specifies a holiday bonus, then you’re guaranteed to get one. Check your personal contract to see if it mentions any holiday bonuses.
How much is a holiday bonus?
Employers usually base holiday bonuses on a percentage of your salary. They usually range from 5-10% of your year’s earnings. For example, if your salary is $50,000 a year, your holiday bonus can vary from $2,500 to $5,000. You can usually determine your bonus percentage by checking your employment contract or asking a supervisor.
Are holiday bonuses taxed?
While bonuses are extra payments that aren’t usually a part of your salary, the IRS considers bonuses to be taxable income. This means that holiday bonuses have the same taxes as your standard paycheck. These are some taxes that may apply to your holiday bonus:
-
Social security: If you earn less than $147,200 in a year, your employer can deduct 6.2% of your holiday bonus for social security.
-
Medicare: Medicare can deduct 1.45% of all taxable income, including holiday bonuses.
-
State income tax: The amount of tax on bonus income can vary by state, so it’s useful to research your state’s tax policies for more information about taxes on your bonuses.
-
Federal income tax: The federal tax rate for supplemental income is usually 25% but may vary if your employer decides to combine your holiday bonus with your regular paycheck.
-
Retirement plan: If you have an agreement with your employer to withhold some of your paycheck for a retirement account, they may also take that percentage from your holiday bonus.
What other types of bonuses do companies offer?
Other types of bonuses that a company can offer include:
Profit-sharing
Profit-sharing is a type of bonus where the company gives a particular percentage of their quarterly or annual profits to their employees. Companies usually determine the percentage you can get from profit-sharing by looking at factors such as annual salary and amount of time at the company. Employers can provide profit-sharing through cash payouts, deposits to financial plans or as part of a different bonus.
Annual bonus
Employers pay annual bonuses once a year and usually base them on overall job performance. Companies use bonuses at the end of a year to reward high achievers and retain employees. Sometimes employers include profit-sharing options in your annual bonus.
Spot bonus
A spot bonus is a financial reward for a particular action or project, usually something that’s beyond your usual job duties. For example, if you work in the IT department but help the marketing department create an online survey, you may qualify for a spot bonus. Spot bonuses are usually one-time payments, and their amount can vary based on the task you perform.
Signing bonus
Signing bonuses occur when you sign an employment contract for a new role. These bonuses may influence new candidates to join a company or persuade top performers to stay. Some signing bonuses come with a clause that if you leave a company before a particular date, you may need to pay the bonus back.
Retention bonus
Retention bonuses are similar to signing bonuses because employers give them to retain valuable talent. Employers can offer retention bonuses during acquisitions, mergers or other restructuring practices to encourage people to keep working at the company. While a signing bonus activates once you sign a contract, you have to work at the company until a predesignated date to receive a retention bonus.
Referral bonus
A referral bonus is a sum of money you receive for recommending candidates for positions at your company. You usually only get a referral bonus after the company hires the person you refer, and they remain at the company for a certain amount of time. Employers offer referral bonuses to find quality candidates, which means the bonuses are often a large amount of money.
How is a bonus different from a commission?
Both bonuses and commissions are types of non-guaranteed compensation that an employer rewards based on job performance. A commission directly relates to a sales quota and the amount of commission you receive varies by how well you meet that quota. While a company can link a bonus to job performance, it doesn’t always directly relate to your production and doesn’t scale like a commission.
This article is for informational purposes only and is not intended to constitute legal advice; you should consult with an attorney for any legal issues you may be experiencing.
