How to Calculate Bonuses for Employees in 2022

What is an Employee Bonus?

An employee bonus is a financial reward given to an employee for an occasion, company contribution, or any other purpose. Companies may give bonuses to both low-level employees and high-level executives. In short, if you’re a dedicated employee with great output or productivity, you’re usually recognized with a bonus.

Bonuses can also be used as an incentive method to get people to apply for jobs, and they can even be given to current employees to appreciate them for their performance and encourage them to be committed to the company.

What are the Types of Employee Bonuses?

Profit-Sharing Bonus

This type of bonus gives employees a share of the company’s profits. The recognition is entirely based on the company’s earnings over a certain period of time. When the company makes money, employers give this bonus to their employees.

Some of the company’s pre-tax profits are put into a pool and given to employees who qualify based on their salary structure and designation. The profit-sharing bonus can either be in stocks or cash.

Holiday Bonus 

A “holiday bonus” is usually given out during holidays (e.g., Christmas, Hanukkah, etc.). The purpose of this bonus is to thank and reward employees who have helped the company be successful.

Spot Bonus

A spot bonus is given to an employee for quite a few reasons, such as when they meet a certain goal or perform well in a task. This bonus is usually given by the manager or the HOD (Head of Department) to show how grateful they are for the task executed by the employee. Moreover, spot bonuses usually come as a surprise to the employee since they are not part of the job contract. The bonus can be a gift, money, or something else.

Referral Bonus 

A bonus is given to current employees for helping to find and hire new employees. The bonus is usually paid after the new employee joins the company and carries out their tasks for a certain period.

Signing Bonus 

It’s a one-time payment that a recruiter gives to a new employee as a sign-on bonus. The motive of this bonus is to get someone to join your company. To get a top employee from a competitor, employers use a “signing bonus.” So, when an employee gets a sign-on bonus, it’s generally part of a contract that says they have to stay with the company for a specific amount of time.

Retention Bonus 

When an employee stays at a company for a certain time, they get a reward for this commitment. Employees who are loyal and productive at their jobs even after they have been offered a job from the competitor companies, managers may award this bonus for their commitment.

Annual Bonus 

This bonus is given to an employee once a year. Most of the time, the bonus is based on the employee’s annual base salary, or it is a set percentage for the department. At most companies, each employee is given a target bonus at the end of the year that they can get if they meet it.

How Does Calculating Employee Bonuses Work?

Bonuses are taxed as supplemental wages, and the IRS offers two ways to tax them. You can either pay it separately with a 22% withholding or add the employee’s bonus to their normal paycheck. 

Pay Bonus By Regular Check

If you decide to pay a bonus with your employee’s normal paycheck, then the bonus tax rate is the same as regular tax rates. You must also pay your share of FICA and unemployment taxes.

Pay Bonus Separately

The IRS also allows you to pay employee bonuses with separate payments. If you choose this option, you have two options for taxing the bonus.

• The first option is to withhold 22% tax. For instance, Gusto allows you to execute off-cycle bonus payments for free and automatically withholds the 22% to aid you to stay compliant.
• The second option is to add the bonus to your employee’s previous pay period’s regular compensation to figure out how much tax to withhold. Once you’ve added them up, you need to calculate the taxes withheld if the bonus was paid. Then remove the prior period’s actual taxes paid. The distinction is what you then should withhold.

Bonus Checks

You can also use the tax gross-up method to calculate how much bonus you may give to your employees after taxes. To make this work, you must raise the bonus.

Here’s how to increase employee bonuses:

• Add all tax rates, state, federal, and municipal.
• Subtraction of the total tax rates from 1 (100%): 1 – tax rate = net% employee paid
• Gross bonus payment = net percent x net payment.

How to Calculate Bonuses for Employees?

Sales Commission

Companies that want to make the sales process more fun, can offer sales commission bonuses. It’s simple, all you need to do is multiply the bonus percentage by the amount you earned. To figure any sales commission, do the following:

• Determine how many sales were made.
• Then find out the total bonus percentage.
• After that multiply the total sales by the total bonus percentage to get the total number of sales and the bonus percentage.

For instance, if you make approximately $10,000 in sales, your company will give you a 5% commission of that money. Here’s the math:

The sum of $10,000 x.05 = $500.

Percent of Salary

If you’re a manager or department head who decides on bonuses, you have to consider how much each employee makes and the amount they get paid. Use the last year’s wage estimate if necessary. It should generally be based on how much each person makes on their own. Consider these steps:

• Determine the employee’s salary.
• Determine the percentage.
• Take an employee’s salary and multiply it by a certain amount (more like a percentage).

If an employee makes approximately $40,000 a year, and the bonus percentage is 3%. Then this is the percent of salary:

In this example, $40,000 x.03 = $1,200

Sign-on bonus

These bonuses are mostly paid at flat rates. However, if you get the bonus in smaller amounts, you’ll require some calculations. When you figure out the contract length, divide that number by the bonus amount. Take the following steps:

• Ensure you know the amount you have to pay when you sign up for the service.
• Determine the contract duration.

If there’s a $1,000 sign-on fee for a job, and the bonus will be paid for five months, then the exact calculations are:

1,000/5 = $200

How Do Bonuses Work with Payroll?

Employers might award bonuses for a variety of reasons. A bonus usually falls into one of two categories:

Discretionary: These bonuses are awarded at the employer’s discretion and are not guaranteed. The employer has not set an expectation that a bonus will be paid, nor has the amount or date of the bonus been disclosed in advance. Spot bonuses and milestone bonuses are given at the employer’s discretion.

No discretion: Your job contract details these incentive-based compensations. You usually get a bonus if you achieve certain requirements, like a performance quota. The bonus is part of your remuneration package if you meet the contract’s terms. Nondiscretionary bonuses include signing and retention bonuses.

There are certain bonuses that are guaranteed. It’s also worth noting that while the bonus itself is guaranteed, the bonus amount is not. Examine your job contract for any promised incentives. Ask a human resource professional if your employer calculates bonuses as a percentage of your salary or a fixed rate.

How Are Bonuses Taxed?

You can calculate withholding using either the aggregate or percentage method.

The Percentage Method

Simply withhold the 22% tax on all the additional wages under $1 million. This rate came after 2017. It’s expected to last through the end of 2025, thus it also applies to bonuses awarded in 2021 and 2022. The IRS calls this the “percentage approach.” If you get a $3,000 bonus, this rate results in a $660 withholding.

The Aggregate Method

The aggregate method of withholding is determined using the normal pay along with the bonus pay, along with the IRS withholding tables.

The same rate is then deducted from the usual income. This sum is then removed from your total withholding on bonus and regular income.

To make things simple, assume your basic pay is around $1,000 and your withholding is $50. Then your management head needs to pay you a total of $3,000 bonus in one go. 

Bottom Line

An engaged and productive team is a company’s most important asset. A motivated team will always remain dedicated, loyal, and most importantly productive. Therefore, providing your employees with bonuses is the greatest way to keep your departments up to the game.