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Managing Employee Payroll Bonuses

When it comes to incentivizing employees, few options are more motivating than bonuses. Employers set goals, employees work hard, and results are achieved – or are they? According to recent research, the way employees are incentivized makes all the difference. Bonuses can be set at intervals, connected to an employee’s individual goals or even in response to achievements the company itself meets. All of these factors play into how hard employees work to achieve their goals – and whether or not they feel valued for that work when goals are met.

Choosing The Best Bonus System

When it comes to employee payroll bonuses, both employers and employees have very strong opinions. According to research by Software Advice, more than 90 percent of U.S. companies favor bonuses over fixed raises. They are easy to implement, based on performance, and incentivize employees to work to their best potential. But when it comes to helping employees work smart, which type of bonus is best?

There are four primary types of bonuses to consider:

  • Occasional
  • Departmental Performance
  • Company-wide Performance
  • Individual Performance

Occasional bonuses are frequently associated with the end of a quarter, year or even the occurrence of a holiday. The point is that this type of bonus is not linked with the quality of work or annual sales numbers. It happens at set intervals regardless of the company’s wins and losses.

Departmental and company-wide performance bonuses are a great way to pull the entire team forward and reward everyone equally, but these do not take work style differences into account. A high-performing employee receives the same bonus as a low-performing employee, which can breed resentment and stifle the desire to work harder toward goals.

Software Advice recommends rewarding individual employees based on personal goals associated with their specific role in the company. This method of bonus payout rewards each employee based on their level of effort and the production of quality work as opposed to something in which they may or may not have a hand. Similarly, it is recommended to pay a percentage of the bonus if employees meet a percentage of their goals instead of making it an “all or nothing” deal.

Filing And Paperwork

Bonuses are treated as supplemental income in the eyes of the IRS. They define supplemental income as something that includes, but is not limited to, “severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.”

There are generally two methods to calculate employee payroll withholdings when bonuses are at stake:

  • The percentage method
  • The aggregate method

The percentage method takes a simple percentage of the bonus as the withholding amount. The aggregate method is more time-consuming and generally means you get to keep less of your bonus. For this reason, our Padgett Payroll Services® specialists encourage use of the percentage method.

In the end, it is important to make sure all employees feel that their work is important. Often, that means showing them how much you value their work in the form of dollar signs. Bonuses are a great way to motivate employees to meet goals, produce quality work, and revitalize the company – but only if they are structured properly. Bonuses are just the beginning.

We encourage you to contact us with any questions.

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