Should You Offer Year-End Bonuses To Your Employees?
A year-end bonus for your employees can be one way to boost morale and increase employee retention and performance.
As a business owner, your end-of-year checklist is probably pretty long — from closing out the books, making a last-minute push to meet goals and finish projects, and gearing up for tax season. But as the year winds down, one important task to keep on your radar is determining whether to give year-end bonuses to your employees.
While year-end bonuses are another expense for your business, there are numerous benefits to rewarding your employees with a bonus, whether it’s issuing an equal holiday bonus to all or distributing performance-based bonuses to your hardest workers. In this post, we’re going to take an in-depth look into employee bonuses, including the benefits, the different types, how to calculate bonuses, and more. Keep reading to see why you should consider offering year-end bonuses to your employees.
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The Benefits Of Offering Year-End Bonuses To Employees
One good thing that has come from the COVID pandemic is that employers are seeing the value of hardworking and reliable employees. To attract and retain employees, more employers are offering bonuses. According to a survey by Zippia, 33% of U.S. businesses offer year-end bonuses. This is up from 30% in 2019-2020.
Unfortunately, there could still be some improvement. According to the same survey, businesses in some industries (including the service industry) and businesses with fewer than 100 employees have less access to bonuses.
If your business isn’t giving year-end bonuses to your employees, you’re missing out on several benefits. Here’s why you should consider rewarding your employees with a bonus.
Increased Motivation & Productivity
By giving bonuses to your employees, you can increase motivation and productivity. Per the Zippia survey, employees who received bonuses or other rewards were eight times more engaged than employees that did not. Furthermore, compensation and pay have consistently been ranked among the top five most important factors of job satisfaction across SHRM’s Employee Job Satisfaction and Engagement surveys.
Of course, it’s important to make sure that your bonus structure is planned carefully to avoid the opposite effect. For example, offering performance-based bonuses at the end of the year can be a good idea provided you have a fair and equal way to assess performance across your business.
Boosts Employee Morale
A little bit of appreciation goes a long way. Offering a year-end bonus is just one way to show employees that their hard work matters and is important to the success of your business. Boosting employee morale is key to increasing motivation and productivity, retaining and attracting top talent, and ultimately boosting your business’s bottom line.
Improved Staff Retention
Giving bonuses is one way to improve your staff retention rates. Employees that feel appreciated and feel that they are fairly compensated are less likely to jump ship for one of your competitors. According to a Gallup study, 53% of workers were classified as not engaged with their jobs. These workers only completed the bare minimum of work and were more likely to leave their jobs for a slightly better offer. Again, offering bonuses is one step to increasing employee engagement and improving staff retention.
The COVID pandemic hit many small businesses hard, leaving many short-staffed and scrambling to find good employees. One way to attract new employees is by offering benefits, such as a year-end bonus. In addition to a year-end bonus, you may also want to consider other types of bonuses and incentives to attract top talent. This includes sign-on bonuses for new employees and referral bonuses for existing employees, which businesses are increasingly using to attract and hire new recruits, according to a study by Indeed Hiring Lab.
Boosts Your Business’s Profits
Gallup’s annual workplace trending shows that employee engagement has increased, in part due to increased satisfaction with tangible benefits. Based on this data, businesses with high employee engagement will not only experience benefits like fewer accidents, more productivity, and better retention rates but will also see improved profitability.
However, one thing to note is that it takes more than just a year-end bonus to keep your employees engaged and satisfied with their jobs. While it is one piece of the puzzle, it’s important to take steps such as giving public recognition to employees and creating a culture where employees feel respected.
Types Of Year-End Bonuses
There are several types of year-end bonuses. Some are based on the performance of your employees, others are based on the performance of your business, and there are also bonuses that 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.
Cash Profit Sharing
Cash profit sharing (or an annual bonus) is a type of bonus that is given to employees and/or managers that is based on the performance of the company. These bonuses are typically given at the end of the year and the amount is primarily based upon the profitability of the company. For example, higher bonuses are given on more profitable years, while lower bonuses (or no bonuses) are given if the business had a tough year financially.
- Makes employees truly feel like part of the team
- Can help boost performance throughout the year
- May cause resentment if bonuses are low, or if no bonuses are given at all
As the name suggests, holiday bonuses are given before the winter holidays. This type of bonus is typically used to show appreciation for the hard work that employees have performed throughout the year. For many employees, this is a welcome token of appreciation, as a holiday bonus can help offset costs associated with the holidays, such as gifts for friends and family or supplies for holiday parties and gatherings.
Holiday bonuses are typically the same amount for all employees. For example, in 2020, Amazon offered holiday bonuses of $300 to full-time employees and $150 to part-time employees. However, some employers may opt for a different bonus structure based on a number of factors such as salary or work performance.
- Can help alleviate financial burdens on employees during the holidays
- Can increase motivation & boost morale
- May cause issues with performance if bonuses are lower or not given in the future
A performance bonus (or merit-based bonus) is compensation outside of an employee’s typical pay in recognition of exceptional performance in the workplace. Typically, this type of bonus is awarded when a company goal or target has been met.
An employee may receive a bonus based on their own merits, such as going above and beyond to serve customers, racking up sales, working well within a team, or bringing a big project to the finish line. Typically, an annual performance review is performed to determine if an employee receives a bonus and the amount of the bonus. Performance bonuses may be a regular company-wide initiative or offered to departments for specific goals, targets, or projects.
- Can boost morale
- Can motivate employees to work harder or meet specific goals
- May promote unhealthy competition among employees
- May cause resentment for employees that received no/low bonuses
Often, we think of bonuses as being monetary. However, there may be instances where a non-monetary bonus may be more appropriate. Whether your business is on a strict budget or you want to combine monetary rewards with a unique non-monetary gift, there are plenty of bonus opportunities that are outside of the box but still appreciated by employees.
Non-monetary bonuses include:
- Gift cards, gift baskets, or other gifts
- Company swag
- Additional time off
- Benefits such as free meals or gym memberships
- Trips, company retreats, or team-building activities
- Can be more meaningful and personalized
- May be less expensive than giving out cash bonuses
- May require more time & planning
- The wrong gift can have a negative impact on morale and performance
How To Calculate Year-End Bonuses
Before calculating year-end bonuses, the first step is to decide what type of bonus you’ll be giving to your employees. Once you’ve chosen your bonus structure, use these tips to easily and accurately calculate your bonuses.
Performance-Based Bonus Based On Sales
If you decide to give employees a performance-based bonus 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 that made $10,000 in sales for the year would receive a bonus of $1,000 ($10,000 x .01), while an employee that 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 that made 10 sales would receive a $250 bonus ($25 x 10), while an employee that made 40 sales would receive $1,000 ($25 x 40).
Bonuses For Teams Or Departments
If you set a goal for a team or department and will be giving an equal bonus to each team member, calculating each bonus is simple. Simply divide the bonus amount by the number of team members. Let’s say you decide to give a $10,000 bonus to a team 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).
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: There are no calculations involved in this bonus structure. Instead, you’ll simply look at your budget and determine a flat bonus rate for every employee (i.e., 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 say you decide to give each employee 5% as a year-end bonus. Simply multiply the employee’s salary by .05. An employee that makes $40,000 per year would receive a bonus of $2,000 ($40,000 x .05). An employee with a salary of $60,000 per year would receive a bonus of $3,000 ($60,000 x .05).
How Do Bonuses Affect Your Payroll & Accounting?
Any wages paid to an employee that aren’t regular wages are categorized as supplemental wages. Year-end bonuses are considered supplemental wages. Supplemental wages — including payroll — are subject to social security, Medicare, and FUTA taxes. There are a few different ways to calculate these taxes.
When Combined With Regular Wages
If the bonus is paid along with regular wages as a single payment and an amount is not specified for each, federal taxes can be withheld at the normal tax rate when you run payroll.
When Paid Separately From Regular Wages
If you choose to pay your bonuses separately, there are different methods for calculating how much tax to withhold. If you have withheld income tax from the employee during the current year or the previous year, you can opt to use one of two methods:
- Flat Rate: A flat rate of 22% can be withheld from the employee’s paycheck OR
- Calculate As A Single Payment: With this method, you’ll determine the amount to withhold by using the employee’s base salary and the bonus payment as if you were making a single payment.
If you have not previously withheld income tax from your employee, only the second method can be used.
Learn more about withholding income tax from bonuses by checking out IRS Publication 15.
When Should You Send Out Year-End Bonuses By?
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.
If you’re giving out performance-based bonuses, these will need to be disbursed following a performance review, the end of a project, or when targets are met. This could be at the end of the year or even at the beginning of the new year.
If you’re giving a holiday bonus, 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.
If your business is giving out 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.
Regardless of when you’re sending out bonuses, it’s important to clearly communicate to your employees. At a minimum, you should let employees know why bonuses are being given and when they will be disbursed. It’s also important to be conscious about how you tell your employees. An email for a company-wide holiday bonus is fine, while performance-based bonuses are better handled in meetings with individuals or teams.
The Bottom Line On Offering Year-End Bonuses To Employees
Year-end bonuses are a great way to motivate your employees, ease financial burdens during the holiday season, and show your staff how much you appreciate their hard work. While year-end bonuses do add to your expenses and take careful planning, this is one step you can take to improve employee engagement, increase satisfaction, and boost the profitability of your business. Good luck!