Tips for Bonuses

“I did well this year because my employees worked really hard. How do I provide bonuses?”

Your HR Survival Tip

Congrats on doing so well that you can afford to share with your employees! There are several things to remember to ensure the bonuses are viewed as a great benefit.

HR JungleFirst, keep in mind that a bonus is a form of wages and, therefore, taxable income. Bonuses can also be subject to overtime. Yes! California seems to have a love affair with weird calculations and this is one of them. You look at any overtime worked by non-exempt employees over the period the bonus covers, then you do a calculation to determine how much overtime must be paid on the bonus. If you choose to ignore this, an employee could choose to collect that money through the Labor Commissioner if they know it should be paid.

Next, bonuses have a special earnings code in payroll. Most of the time it feels like half the bonus amount goes to taxes… which deflates the excitement of a bonus. You can avoid much of this by setting it up in payroll differently:

  • Plan to pay the bonus with a separate check. I prefer a “live” (paper) check for the impact and excitement.
  • Set the bonus checks on a different pay cycle. Your pay cycle is probably currently set to weekly, biweekly, or semi-monthly. Change it, for the bonus checks only, to the longest pay cycle available (monthly, 9 weeks, etc.). This tricks the system into thinking this employee makes only this amount [i.e., the bonus amount] each month, 9 weeks, etc. so it uses a lower tax bracket.
  • Temporarily turn off the non-required deductions, if possible. You need to consider all the deductions active on regular checks… find out which you can or can’t stop for the bonus check.
  • Once you’ve processed those checks, make sure the system reverts to your usual pay cycle and deductions for the next payroll check.

You must decide which of the two types of bonus you are giving, discretionary or non-discretionary. This isn’t typically a last minute decision but can be the first time. Going forward, now’s the time to set up your plans for next year’s bonus.

Discretionary bonuses should be considered a surprise bonus. Employees shouldn’t expect it, don’t know why they “earned” it, and isn’t provided regularly or at regular times. If you just like to toss money to employees for the holidays, this is typically the bonus for that. You don’t have revenues, goals, or anything else tied to this bonus or it can legally lose its discretionary status.

Non-discretionary bonuses are my preference because I don’t like providing employees money without their understanding of what they did to “earn” it. Yes, non-discretionary bonuses are legally payable every year (or whatever period you have set) if goals are met but you are the one who sets those goals. Obviously, the first goal is meeting or exceeding the necessary company revenues or growth needed to even have a bonus pool that period. Other goals can be broken down by departments, locations, and individuals. Even your lowest-level employee should have goals based on objective criteria, such as hours worked, productivity or efficiency.

  • If you choose a non-discretionary bonus, you really need to create a written bonus plan that employees also sign. A few of the critical factors in the plan should be, for example:
  • Employees must be actively employed at the time bonuses are paid out.
  • Employees who have been actively working for only part of any plan year will receive a pro-rated (or no) bonus.
  • New employees must be actively working at least X months to participate in the bonus plan that year/quarter/etc.
  • Determination of whether a goal is met is at the owner/CEO’s sole discretion and their decision is final.

Employees talk and, legally, you can’t prevent them from discussing their bonuses. Make sure your bonus plan, discretionary or non-discretionary, is developed in a way you can explain why each person received the bonus they did. You don’t want this great benefit tarnished by concerns of discrimination in how the bonuses were given or the amounts received. Let us know if you need help with this!

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