Year-End Bonuses: Benefits and Drawbacks

As 2021 comes to a close you may be considering doling out year-end bonuses for your employees. A year-end bonus is a lump-sum given to each employee to reward dedication and hard work. Most small-businesses do not offer bonuses, however those that do see the positives. There are both benefits and drawbacks to year-end bonuses. 

How much should a year-end bonus be? 

A year-end bonus amount is entirely dependent on the type of business and the number of employees. As a rough estimate, Indeed says, “most employees earn bonuses equal to 1% to 5% of their overall salary.” This obviously means the employees are rewarded based on their job title, which determines their salary. 

Benefits to Year-End Bonuses

When an employee receives a year-end bonus, they are more likely to stay loyal to the organization. The employee feels appreciated when they are given a reward for doing their job well. This makes the employee want to stick around. An employee may come to expect a bonus, especially if it is part of your job offer. Not only does this assist with retention, but it also makes recruiting easier. In a struggling labor market, businesses need to do everything they can to recruit and retain quality employees. 

Drawbacks to Year-End Bonuses

There are a number of drawbacks to bonuses, which, according to the Small Business Organization, is why only 35% of small businesses give them out. Year-end bonuses can be costly and create animosity between employees. 

Cost 

Depending on the number of employees you have, year-end bonuses may not be feasible. Even though there may be a specific amount traditionally given, that doesn’t mean you need to give that amount. If you cannot give a bonus, you should let your employees know up-front so they are not counting on it during the holiday season. 

Taxes

The bonus costs you money as the business owner, but it also costs the employee money through their taxes. A bonus is included in an employee’s total compensation, which means they will be paying higher taxes. While a bonus may not affect the AGI, if it does, the employee may not appreciate the bonus due to the higher taxes, which defeats the purpose. 

Jealousy 

Unless you have a clear system for your bonuses, they can create a negative work environment. People may be upset at the amount they receive or the amount a coworker receives. A way to avoid this would be to give a percentage of their salary or give every employee the same amount. Of course, you will also want to communicate with them clearly so they know what to expect. 

Most employees will appreciate a year-end bonus, especially if it doesn’t affect their AGI. Consider communicating with your employees about your plan for potential bonuses.