How to Calculate Bonuses for Employees

Cody Cromwell
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Types of Employee Bonuses

Before you start looking at the mechanics of calculating employee bonuses, you need to take a look at the types of bonuses you can go with.

There are two types of bonus that you can offer your employees: cash and non-cash.

Cash bonuses are obviously cash that you give to an employee. These can be either ready-to-hand (entirely cash), ready-to-use (like prepaid credit cards), or partially in hand, like a loan.

Non-cash bonuses are something that is either non-itemized, non-cash, or both. Maybe it’s something tangible that your employee can use or something that is only useful when certain conditions are met, like the employee being on an extended vacation.

Employee bonuses should be a way to reward employees for their contributions to your business. They should also be flexible and tailored to suit your company financials and your employees.

Here are some guidelines to help you determine the types of bonuses you should be giving your employees:

  • Employees who are getting paid relatively well will be your best advocates of your company
  • On the other hand, employees who are not getting paid well will probably not know how to make the best use of their teams
  • Greater cohesion among your employees will encourage these motivated people to continue contributing well, thus increasing employee morale, productivity, and building a stronger company culture

How to Calculate Bonuses for Employees

Bonuses, including pay bonuses, are an extremely popular reward for a company’s employees and often encourage top performance. But how do you calculate bonuses for employees? What bonus formula can you use to calculate the bonus figure?

This article will cover both the question of how to calculate the employee bonus figure and also how to calculate an employee bonus figure for a profit share percentage.

In this post, we’ll cover the steps involved in preparing a bonus plan for your employees. Also, we’ll touch on how to calculate employee bonus figures for profit sharing percentages.

Performance-based Bonuses

The performance-based bonus is only appropriate when performance is the key factor to a company’s success.

For non-performance-based bonuses, non-discretionary compensation is the most commonly used. It is used to supplement the salaries of the employees and ensure that their work is paid as per their responsibilities and value.

A bonus that is appropriate for non-performance-based compensation is the performance bonus. In order to motivate the employees of a company, a performance bonus is given to the employees if they perform well.

The performance-based bonus is given only if the performance of the employee has exceeded the performance benchmark set by the company. The bonus is given as a percentage of the base salary.

The performance-based bonus is generally given on a consistent basis, which is dependent upon the performance of the employee. In some cases, it is given periodically when performance falls below the performance benchmark.

The performance-based bonus can be of any amount, however, it should not be more than 20 percent of the employee’s salary. Since this is the case, the base of the performance-based bonus is normally in the range of 25 to 65 percent of the salary.

When an employee is given a bonus based upon the performance of the employee, the performance is evaluated based upon.

  • The quality of the work performed
  • The quality of the deliverables

Nonperformance-based Bonuses

When employees aren’t fired for poor performance, the company will often award them with nonperformance-based bonuses. These bonuses can take several forms – from product discounts and non-cash instruments to time off, paid product training, or discounts for the employee’s entire family.

How to choose and calculate a nonperformance-based bonus?

The objective of nonperformance-based bonuses is to reward employees who are doing the right things.

You should use nonperformance-based bonuses only when the work behaviors of your employees can be changed, but when they are in place it can help sway their behavior.

They jump-start employee motivation.

As an added benefit, you could use nonperformance-based bonuses to arm your employees with the tools necessary to improve their skills and recognize their accomplishments.

Stock Options

Stock options are another type of nonperformance-based bonus. They can be awarded annually or as a gift of appreciation. When the company is growing, the value of stock options tend to increase which encourages employees to remain loyal.

Rewarding Productivity

Productivity bonuses can also take the form of nonperformance-based bonuses.

How to Calculate & Pay Taxes on Bonuses

Bonus money is something employees work hard for. Companies that pay regularly offer bonuses selectively to show their appreciation for good performance, but cannot avoid taxes as taxable income.

The amount of the tax owed depends on whether or not the bonus represents 20 percent or more of the employee’s annual income.

Pay Bonus With Regular Check Without Specifying Amount

Employees may not like it, but it’s still a common practice in corporate finance to give bonuses based on the company’s financial performance. It’s a great way to incentivize the team and reward employees for a job well done.

A bonus is based on the profitability of the company. So you can calculate the amount of bonus payable using the following formula:

  • Bonus = Percentage of Net Profit … Bonus Amount
  • But the question is, how do you normally calculate the net profit without the employees know the percentage of the profit?

With fxPro Premium Plan, you can easily do this in the Balance Sheet area. Insert a new column to calculate the net profit and enter a zero amount. If the amount of net profit is calculated from the Operating activities, then skip the insert a new column step.

The next step is to check the column to record the total bonuses. When months pass, you can check the transaction history to see how much bonuses were awarded and the associated profit from the company’s perspective.

Alternatively, if you’re not a premium user, you can enter the information that you can gather from the company’s profit and loss statement. This method is more time consuming than the one mentioned above but has the added benefit of giving the employees more transparency.

Separate Bonus Check From Regular Check

The first thing you will want to do is to get this bonus as a separate check from your other checks. The reason for this is that most employers have a maximum dollar amount as to how much money they are willing to pay out in a single check.

So if you are paid weekly and are given an additional 25% or 50% of your weekly salary as a bonus, that is a lot of money, and you will want to make sure it is paid as a separate check.

This way if your pay that week is not as high as usual, you can take the extra money in the bonus check.

But it would be a shame if that money is taken from your regular check, right? So given that most businesses have a maximum bonus amount, you will want to split your bonus checks between any outstanding work that you have not finished yet.

The bonus check is for extra work you did beyond your normal job, so not finishing some of your project work could count as extra work for you.

So if you are not going to put the checks for work done on your bonus task on hold for your regular pay, you could subtract that from the bonus total, and then divide the remainder by the number of weeks that you are paid.

Gross Up Bonus Checks

We’ve seen statistics that serve to show employees that their bosses are more concerned about their own income than their own. One benefit that employers will gladly pay out to their employees is the gross up bonus. Essentially this is an additional paycheck that you’re entitled to if you are fired or laid off.

This bonus is sometimes referred to as a severance bonus and can vary from 1 week of pay up to 50 weeks. However, if you are fired or laid off, your gross up bonus is never less than 50% of your regular monthly pay.

A gross up bonus is paid out in addition to whatever is already in your paycheck – full or partial – but it’s paid out gross, not net. The net amount that is in your paycheck is what you get to keep following your pay date.

Pros & Cons of Paying Bonuses to Employees

Bonuses may be one of the best ways to incentivize employees, but they also come with their drawbacks. In this post, we’ll take a closer look at the benefits and drawbacks of paying employees bonuses.

Pros of Paying Employee Bonuses

There are some companies that offer employees bonuses. When the bonuses are paid, they are often based on the employee performing a set work function. For example, if the employee contributes to the overall company bottom-line and helps the employee acquire a base level of knowledge, then the likelihood of an employee receiving bonus increases exponentially.

Here are some additional pros of paying your employees bonuses:

The increases in employee morale are well worth while when an employee receives a bonus. An employee’s first thought after receiving a payment bonus will be the additional payment itself. They’ll probably feel better about the management if they have more money and will be more likely to work harder.

Increased employee productivity means that the labor-cost can be lowered and the bottom line can be increased.

Employers usually enjoy the increased return on investment as some of their expenses are covered by the employee bonus.

Bonuses often lead to increased performance because the employee knows the reward they will receive.

Bonuses show the employee (with a high likelihood of the management showing) that the management believes that the employees are doing an exceptional job.

Increase Employee Motivation and Performance

The method of calculating bonuses can also play an important role in their effectiveness.

Cons of Paying Employee Bonuses

It can be hard to turn down a bonus. Bonuses are an effective way to reward an employee for their hard work and can help them feel good about their contribution to the business. And a bonus is a great way to thank them or motivate them to perform better.

But bonus payments should only be given after a thorough analysis of the situation. Relying on employees to make good decisions during a tough market…or failing to do so…can result in poor performance.

Avoiding being lulled into a false sense of security by employees by distributing bonuses can protect against this, but if your business is struggling in a tough economy, bonuses can be a tempting alternative to salary increases. So proceed with caution, but also be sure to assess the situation before giving any bonuses.

Paying bonus can help motivate an employee to do well and positively push the business forward. But a bonus can also experience the opposite effect. While you do want to give bonuses to employees, you need to be aware of the possible consequences.

Once you start distributing bonuses to employees, you’ll need to keep a sharp eye on your company’s progress to prevent losses from becoming worse.

Frequently Asked Questions (FAQs) on How to Calculate Bonuses for Employees

While calculating bonus amounts is very easy to do when you deal with a large company with broad profit margins and, therefore, a larger surplus or budget, things get trickier in smaller organizations with narrow profit margins and a very limited budget.

To simplify things for you, there are two types of bonus calculations that can be very useful:

{1}. Linear bonus calculations: The ideal method of calculating bonus amounts is to use a linear bonus formula that uses straight-line methods. This allows you to figure out bonus amounts by using simple arithmetic. You will need to know what percentage of expected profit your company makes to use this method.
{2}. Pro-rata bonus calculations: If you don’t have enough data to use a straight-line formula, you can use a pro-rata bonus formula that calculates bonuses based on the total contribution of all employees.

Once you have figured out your expected profit, you can calculate December payouts and bonuses.

How are bonuses taxed in 2019?

Employers have an ongoing obligation to make sure that they keep track of their employees’ tax contributions under the PAYE system. This means that any bit of money they give to their staff – either a bonus, commission or other type of payment – has to be paid to HMRC.

The rules around when and how bonuses are taxed are complex. To be sure you’re doing everything right, we’ve put together this guide. In it we’ll cover:

  • Which type of earnings are taxable and untaxed
  • Which bits of the bonus are subject to PAYE
  • The various ways to calculate the tax
  • How to handle things if you don’t have the money to pay up
  • Types of Bonus Employees Earn

What are some non-cash bonus ideas?

(i) To start a savings scheme: consider providing a bank passbook to each employee, directing all salary payments into it. The employee may decide to deposit the entire sum into a separate savings account for emergencies or, possibly, into a different account for tax planning; the bank will pay a small interest rate, which you will match. This will quickly generate an account for every employee. You can also have the scheme run automatically every payday; aside from the interest generated, the scheme also provides a simple, cheap record of your employees’ earnings.

(ii) To give an additional gift: rather than an annual bonus or commission, give a single sum at the end of the year. If the employee is married and has no children, regular income-splitting will usually work: you will deposit the bonus into two separate accounts (one for the employee and one for her spouse); the recipient can then do as she pleases with the income-split. If the employee has children, however, the income-split is likely to result in tax liabilities that are too large to be practical or acceptable; in such cases, the bonus may make sense to make the whole sum into one account under the employee’s control.

What should I know about calculating bonuses for hourly employees?

When calculating an hourly employee’s bonus for the year it’s best to base it on a percentage of their hourly pay rate. This gives everyone an incentive to work hard because it rewards them for working longer than they would otherwise. It also gives management an incentive to work hard to keep the employee motivated and consistently performing. This will keep the team motivated and there will be less turnover.

Elements in determining a bonus should include performance such as sales volume or customer satisfaction percentages, so long as they are based on systematic measurements.

If you hate math—and who doesn’t (unless you’re a math whiz)…then you’re in luck. There’s a handy online formula, called the rule of 70, which can quickly determine how much a percentage will be.

Here’s how to calculate it:

Bottom Line

As a business owner or company leader, you’re always looking to cut costs and increase efficiency. One of the most obvious places to look is your employees. If you’re consulting an employee benefits company or you’re considering hiring one to help you with employee benefits, you’re probably looking for the perfect employee benefit.

The good news is that you can still get employee benefits that are good for your budget and good for the employees. The key here is to look at employee benefits as a package, not an all-or-nothing approach approach.

As you’re going through and analyzing employee benefits, you’ll need to make sure you’re comparing your compensation package to a benchmark. The benchmark should be structured so that your entire package of benefits is much better than the median in your industry. The benchmark should be able to hold up under a hands-on audit from an experienced benefits provider.

The cost of earning employee benefits can add up and cause some damage to your budget. However, it’s possible to make employee benefits a smart investment that can pay for itself.