What Is a Year-End Bonus?
A year-end bonus refers to a form of compensation paid by employers to their employees in addition to their wages or salaries. Put simply, a year-end bonus is a reward that companies pay their workers.
The amount paid can vary but is usually based on an employee's position and salary. It is commonly tied to performance metrics, which means it can depend on whether certain milestones are met. Year-end bonuses may be made in different forms, including lump-sum payments in cash, to reward individuals for their hard work and dedication.
Key Takeaways
- A year-end bonus is a form of compensation that employers pay to their employees in addition to their regular earnings.
- This type of bonus is often tied to performance metrics.
- Bonuses can be made in cash as lump-sum payments or in other forms, such as stocks or paid time off.
- Employers and employees may arrange to have year-end bonuses paid in the following year for tax planning purposes.
- Use your bonus to spend, pay off debt, or save.
Understanding Year-End Bonuses
Compensation comes in many forms. Depending on the nature of the work and the type of company, employers may offer their employees salaries, wages, commissions, retirement plans, health benefits, stock options, and tips. Another type of compensation is the year-end bonus, which may also be called an annual or Christmas bonus.
Year-end bonuses are offered by companies of different sizes, from small businesses to large multinational corporations. As noted above, it is normally tied to an employee's performance over the calendar or fiscal year.
So employees who meet their sales quotas or other metrics may qualify for one. In some cases, anyone who exceeds their goals may be entitled to higher bonuses. It isn't uncommon for top executives and employees of financial firms on Wall Street to receive large bonuses at the end of the year.
If a company misses its targets or otherwise underperforms, a company may withhold year-end bonuses for some, if not all, individuals on the payroll.
Year-end bonuses are often paid in cash as lump sums. Some companies, though, may choose to compensate their employees in other ways. This may include supplemental vacation days, gifts, or in-kind transfers of stock. Bonuses fluctuate depending on the economy and the year's performance, but in most years the amount is substantial.
Some companies may include these bonuses in their employees' contracts to encourage consistent results. Contractual year-end bonuses are more often offered to executive management when they are hired or promoted, and might not be tied to the company’s performance at all.
In this capacity, the bonus can serve as a hiring and retention tool to keep key personnel on board with a company when job openings at rival companies offer higher base salaries.
Special Considerations
Companies and employees may choose to defer payment of a year-end bonus until the next year. So rather than receiving it in December, an employee may receive their bonus in January or February.
This option allows workers to push any additional tax burden to the next year. So although the employee qualifies for the bonus this year, the tax consequences don't apply until they receive the bonus the following year. This allows an employee to plan for the windfall at the end of the next year.
Employers have remained cautious since the COVID-19 pandemic. According to a 2023 survey, 34% of employers didn't give their employees a year-end bonus. Of those surveyed, 76% of the companies paying a bonus said they would keep the amount the same while 15% said they were decreasing the amount.
How to Use a Year-End Bonus
There are several ways you can choose to use your year-end bonus. But before you do, it's always a good idea to weigh out the options so you make the right choice.
- Spend it. This is the first inclination that people have when it comes to their bonuses. Because it's a reward for good performance, you may be tempted to go shopping and make big purchases, whether the payout is big or small. Maybe you want a new TV or need a new laptop. Or you could use it to make those much-needed repairs on your car.
- Pay down debt. This is extra cash that you may not have had, so it's always a good idea to clear your debt. You can pay down your credit cards and student loans. You may even choose to make a prepayment toward your mortgage to cut down your principal balance.
- Put it into savings. If you have little to no debt, consider setting your bonus aside into a savings account, a certificate of deposit (CD), or another investment vehicle. If you have room, you may choose to put it into and top off your retirement account.
Do Year-End Bonuses Get Taxed?
Yes, year-end bonuses get taxed. They are seen as another form of compensation and are subject to income tax just like any other form of payment from your employer.
Why Do Companies Give Year-End Bonuses?
Companies give year-end bonuses for a variety of reasons. Offering a year-end bonus can be an attractive offer when seeking to hire new employees, especially talented ones. Bonuses are a way to reward good employees for a job well done, inspiring a positive view of the company. This also helps retain good workers. Similarly, bonuses can be offered as an incentive for employees to work harder and better.
How Do You Calculate a Year-End Bonus?
Year-end bonuses are usually calculated as a percentage of an employee's salary. For example, if an employee makes $100,000 a year, they can be offered a 20% bonus, which would equate to $20,000. Each company will determine how their bonuses are calculated.
The Bottom Line
A year-end bonus is an additional form of compensation paid to employees at the end of the year. It is usually based on performance or meeting pre-set goals. A bonus can be seen as a reward and is considered by employees when evaluating total compensation at a prospective employer.
Similarly, it is used by employers to make a job more attractive to potential candidates as well as an incentive tool to retain good workers or encourage better performance. Bonuses are often paid out as cash lump sums at the end of the year but can also be offered in other ways, such as stock options.
