Why Pay Employee Bonuses_ A Boss's How-To Guide

Author: Joan Koehne |

Blog by Prosperity Bookkeeping LLC

As the end of the year draws near, many small business owners are considering bonus pay for their employees. Companies have plenty of good reasons to provide this employment perk. When the company is having a good year, employers have the flexibility to award bonuses; employees share in the wealth. Or on the flip side, employees share in the pain if the company isn’t having a good year and doesn’t issue bonuses.

Unlike employee raises that commit employers to long-term, cumulative expenditures, bonuses are one-time perks. Thus, bonuses are easier to control and introduce in manageable levels. Bonuses come in a variety of forms and can be used in addition to raises to compensate, reward, and retain quality workers.

Why Pay Employee Bonuses?

In today’s hot labor market, hiring and retaining employees can be a challenge. Small businesses can thank their employees for their hard work and loyalty with a bonus – making them think twice about job hopping. Also, bonuses are a great form of employee appreciation to keep workers happy and motivated to perform at their highest level.

How to Pay Employee Bonuses

For year-end bonuses, the amount depends on a company’s financial position, corporate tradition, and other factors. In general, the 2022 average bonus was 11% of monthly salary for exempt employees, 6.8% for nonexempt salaried employees, and 5.6% for hourly employees. Source.

Small businesses have a couple of options when paying a wage bonus.

1. Add the bonus to the employee’s wage by adding the bonus to the employee’s paycheck

2. Issue a bonus check separate from the employee’s paycheck

Employee Bonuses and Taxes

With either method, the employee is required to pay federal income tax, Social Security tax, Medicare tax, state income tax, and local income tax on the bonus. Small businesses can calculate federal income taxes on bonuses by referring to IRS Publication 15 (Circular E), Employer’s Tax Guide .Some business owners pay employees the bonus amount plus any taxes associated with the bonus. That way, the employee receives the exact amount the employer intended to give. Small business owners should consult with their bookkeeper or payroll specialist to determine the most effective way to issue a bonus.

Contact Prosperity Bookkeeping

For more payroll, bookkeeping, and business finance tips, contact Prosperity Bookkeeping .From our office in Green Bay, Wisconsin, we provide virtual bookkeeping, payroll, and accounting services for clients throughout the U.S. We make bookkeeping manageable for small businesses.

About the Author: Once a mild-mannered reporter and editor, Joan Koehne took on the persona of her alter ego, Wonder Writer, to launch Writer to the Rescue , the content writing division of Packerland Websites. Wonder Writer is “saving the world one word at a time” with power-packed content marketing for digital and traditional media outlets.