What Is A Year-End Bonus?

Year-end bonuses are given out to employees as a reward for their contributions to the business throughout the year. While year-end bonuses are another expense for your business, there are numerous benefits to rewarding your employees with bonuses, including boosting morale and improving staff retention.

This guide takes a deep dive into year-end bonuses, including their benefits, the different types of bonuses, how to calculate bonuses, and more. Let’s get started!

What Is A Year-End Bonus?

A year-end bonus is a form of compensation or benefit earned by employees as a reward for their work throughout the year and is usually between 5%-10% of an employee’s annual wages. Bonuses may be monetary or come in other forms, such as additional PTO days or paid gym memberships.

Year-end bonuses may also be referred to as Christmas or annual bonuses. They differ from traditional bonuses because they are only given out at the end of the year or sometime during the year’s final quarter.

As a form of supplementary income, monetary bonuses are taxed at a different rate than regular wages. Year-end bonuses may also be counted as a tax-deductible business expense.

The Benefits Of Offering Year-End Bonuses To Employees

From increased productivity to reduced staff turnover rates, year-end bonuses benefit both employees and employers alike. Before considering the benefits of year-end bonuses, employers need to consider the additional cost and whether it’s worth incurring.

If you’re on the fence, here are the benefits of year-end bonuses you should consider:

• Increased Motivation & Productivity: Just as minimum wage increases lead to improved employee productivity, increasing an employee’s base wage through a year-end bonus is likely to yield the same results.
• Boosts Employee Morale: Offering a year-end bonus is just one way to show employees that their hard work matters and is essential to the success of your business. A little appreciation goes a long way.
• Improved Staff Retention: Employees who feel appreciated and fairly compensated are less likely to jump ship for one of your competitors with a less competitive benefits package.
• Attract Employees: Besides helping your business keep employees, bonuses can help attract employees during the recruitment process. Bonuses are one of the top employee benefits your business can offer.

Types Of Year-End Bonuses

There are several types of year-end bonuses. Some are based on the performance of your employees and others are based on the performance of your business. Some bonuses aren’t tied to performance at all.

Learn more about the types of year-end bonuses to determine which makes the most sense for your business.

How To Calculate Year-End Bonuses

To calculate year-end bonuses, you’ll need to decide what type of bonus you’ll be giving to your employees. Once you’ve chosen your bonus structure, use the following tips to easily and accurately calculate your bonuses.

Depending on which type of bonus you offer, the best payroll software can automatically calculate bonuses and make off-cycle payroll runs. Otherwise, you can calculate year-end bonuses manually.

Performance-Based Annual Bonus

If you decide to give employees performance-based bonuses based on sales, you’ll need to have sales figures for each employee. There are two ways that you can calculate bonuses based on sales.

• Percentage Of Sales: One option for year-end bonuses is to give employees a set percentage of their sales. If you decide to give your employees 10%, simply multiply 0.10 by the employee’s annual sales. An employee who made $10,000 in sales for the year would receive a bonus of $1,000 ($10,000 x .01), while an employee who made $5,000 in sales would receive a $500 bonus ($5,000 x .01).
• Number Of Sales: Another option is to give a flat rate for each sale made by an employee. For instance, let’s say that you decide to give an employee $25 for each sale made throughout the year. Simply multiply $25 by the number of sales made. An employee who made ten sales would receive a $250 bonus ($25 x 10), while an employee who made 40 sales would receive $1,000 ($25 x 40).

Bonuses For Teams Or Departments

Calculating each bonus is easy if you set a goal for a team or department and will be giving an equal bonus to each team member. Simply divide the bonus amount by the number of team members.

Let’s say you give a team a $10,000 bonus after completing a project. Ten team members worked on the project. In this example, each team member would receive a bonus of $1,000 ($10,000 / 10).

Non-performance-Based Bonuses

If you decide to give a non-performance-based bonus, there are a few ways to go about doing this. Two of the most common include:

• Equal For All Employees: No calculations are involved in this bonus structure. Instead, look at your budget and determine a flat bonus rate for every employee (e.g., giving each employee a $500 holiday bonus).
• Percentage Of Salary: Another structure for non-performance-based bonuses is giving each employee a percentage of their salary. For this example, let’s consider a 5% year-end bonus and multiply an employee’s salary by .05. An employee who makes $40,000 per year would receive a bonus of $2,000 ($40,000 x .05).

How To Calculate Bonus Pay Taxes

Any wages paid to an employee that aren’t regular wages are categorized as supplemental wages. Year-end bonuses are considered supplemental wages and are subject to payroll taxes, including Social Security, Medicare, and FUTA taxes. There are a few different ways to calculate bonus taxes.

When Should You Send Out End-Of-Year Bonuses By?

Year-end bonuses should be sent out by the end of the current year or before the end of the first quarter of the following tax year. The timing of sending out year-end bonuses varies by a few factors, including the type of bonus and why the bonus is being given.

• Performance-Based Bonuses: This bonus should be disbursed following a performance review, at the end of a project, or when targets are met. This could be at the end of the year or at the beginning of the new year.
• Holiday Bonuses: These should be disbursed around the end of November or the beginning of December. Your employees will appreciate receiving these bonuses in time to purchase holiday gifts or pay other expenses.
• Multiple Bonuses: It’s important to provide adequate space between the bonuses, so there is no confusion. For example, distribute holiday bonuses in late November or early December, while annual bonuses can be distributed in early January.

The Bottom Line: Should I Offer A Year-End Bonus?

Rewarding employees through a year-end bonus will benefit both your employees and your business.

However, if you decide to offer year-end bonuses, you’ll need to ensure that your business can afford the additional expense. It’s best to build bonuses into your business’s payroll budget at the year’s start rather than trying to fit them in at year’s end.

Need more help fitting bonuses into your business’s budget? Check out our resources on business budgeting and year-end payroll:

• The Ultimate Year-End Payroll Checklist
• Year-End Accounting Checklist

Year-End Bonus FAQs