Many companies offer a variety of great benefits. This can include affordable medical benefits, stock options, workplace perks, and sometimes, occasional financial rewards like work bonuses. Getting compensated for your work is a great reminder of how hard you’ve worked for your company.
In the U.S., the typical work bonus is about 11% of the average exempt employee’s salary and 6.8% of a non-exempt employee’s salary. For many, that’s a generous amount of additional income that could really help achieve financial goals.
If you’re qualified for a bonus with your company, prepare to spend it wisely. Below are tips on how to spend your work bonuses wisely. But first, let's talk about what they are and how are bonuses calculated.
What are bonuses, and how are bonuses calculated?
So, what are bonuses? A work bonus is compensation from your employer outside of your income. This is based on individual or company performance over a certain amount of time. Work bonuses are a reward for achievements in the workplace.
This can also include overall company performance or as an incentive for a potential employee to accept a job offer.
With bonuses, workers are rewarded annually, quarterly or yearly by their company. How bonuses are calculated is up to the company, but typically adds up to a percentage of your base pay.
You pay tax on work bonuses
If you are qualified to receive a bonus at work, be mindful that this additional pay is taxed. According to U.S News & World Report, bonuses are taxed at a flat 22% of the total amount. Employers may also add your bonus to your paycheck.
Bonuses added to your paycheck are taxed based on your regular tax withholdings. You will also need to claim your work bonus as income during tax season.
Note: It's important to do your research to find out whether your bonus will increase the amount you owe during tax season. An accountant can help.
Common types of work bonuses
Receiving a bonus at work can come in many forms. Here are the most common types of work bonuses employees offer:
Annual bonus and quarterly bonus
An annual bonus or quarterly bonus rewards employees once a year or quarter. Employees receive a bonus based on their overall performance during a period of time. That performance is then assessed and a reward is given annually or quarterly.
Year-end bonuses pay employees at the end of a calendar year. Like annual and quarterly bonuses, year-end bonuses are based on milestones created at the beginning of the year. Once those milestones are met, employees receive a bonus at the end of the year.
Some employers give out work bonuses during the holiday season to show their gratitude. Holiday bonuses are for all employees, regardless of performance goals.
Holiday bonuses boost morale, reward hard work, and increases productivity going into the new year.
Profit-sharing bonuses are bonuses based on the success of the company. Employees earn a portion of the company's profit made during a period of time.
Profit-sharing bonuses motivate employees to boost the company’s earnings, then shared with all employees.
Commissions are another common type of work bonus. Commission bonuses are based on very defined performance goals. This type of bonus is common in the sales industry.
Spot bonuses are given “on the spot" for achieving a certain goal. These types of bonuses encourage employees to work to receive additional income almost immediately. As a result, spot bonuses are typically less than annual, quarterly, or year-end bonuses.
Many companies offer signing and referral bonuses. These bonuses are based on recruiting and retaining new employees. If you are in the market for a new job, ask the company whether they offer a signing bonus.
A signing bonus encourages applicants to accept a job offer. Once a new hire is on board, employees receive a signing bonus after a certain period of time with the company. Try negotiating a signing bonus with a new company if they are looking to hire you.
Referral bonuses acknowledge employees who bring new talent into the company. Afterward, that employee receives a bonus for bringing in qualified talent.
6 Ways to spend your work bonus wisely
If you are qualified to receive a bonus, prepare in advance for the expected windfall. Plan to spend your work bonus wisely when it hits your bank account to help reach your financial goals.
1. Pay down debt
Whether you are receiving an annual bonus, a quarterly bonus, or a bonus for bringing in new talent, use it to pay down personal debt. It's a good idea to plan ways to pay down debt from credit cards and loans with your bonus.
If you are already working towards paying down debt, a work bonus can help speed up your progress. Find a debt repayment method that can help you achieve your goal of paying down debt.
As an example, one debt repayment method is the snowball method, where you pay the smallest amount first. In addition, another debt repayment method is the avalanche method, which focuses on debt with the highest interest rate.
In short, with an extra couple of dollars from your bonus, you can spearhead paying off your debt in full.
2. Save your work bonus
Costs of living expenses are currently putting a strain on everyone’s finances. That said, your work bonus could be just the extra cushion you need. Save your bonus for sudden emergencies.
Give your emergency savings a boost and save your work bonus for a rainy day. You can also save your extra funds toward a bigger financial goal as well.
Looking to purchase a home in the future, or finally buy your own car? Put your bonus away to help reach your future savings goals.
Find a savings account with a high-interest rate so that your money continues to grow. This will allow your money to accrue interest over time.
Be sure to do your research on the best savings accounts and their current interest rates to get the best bang for your buck.
3. Turn your work bonus into an investment
It's a good idea to continue to invest in yourself with your work bonus. Start or increase your contributions to a 401(K) or Roth IRA with the additional money from your bonus.
Contributing to an investment plan with your work bonus has its benefits. Your 401(K) contributions are tax-free. Additionally, it compounds interest over time, so you can watch your bonus grow. In turn, your work bonus will contribute to the growth of your overall portfolio.
Maxing out your investments also pays off during tax season. Investing your money into your 401(K) plan reduces your taxable income in time for next year's tax season.
So if you’re looking to start diversifying your portfolio using your work bonus, research different types of investments. For example, stocks, funds, bonds, and even cryptocurrency are all types of investments to look into.
4. Give your work bonus as a donation
You could also give back financially using the extra money you receive from your work bonus. For instance, you could donate your work bonus to a charity or organization that could use the extra financial assistance.
This would allow you to contribute to a meaningful cause with your unexpected windfall. Your contribution could help someone else in need. Be sure to use any sizable charitable donation you make as a deduction during tax season.
Don't forget to document your contribution to the charity or organization for tax purposes.
5. Contribute to a bigger investment plan for your family
Have big plans for your family's future? Use your annual bonus to invest in your family for a more secure financial future. For example, consider opening a college savings plan for your children to prepare them for a degree debt-free.
A 529b college savings account is a great way to set aside money for your children’s future education.
Consider saving your work bonus for upcoming major purchases too. For instance, save your bonus to put a down payment on a home for your family. You can never go wrong with putting aside extra funds to invest in your family’s future.
6. Start your own business or side hustle
Why not use your work bonus to make more money? Use your bonus to help start a new business or side hustle. Invest in yourself and get the tools you need to kickstart your own business.
Additionally, look for ways to enhance your skills. Use your work bonus for classes or trainings to propel your side hustle. Set aside your work bonus to prepare yourself for your next business venture!
Use your work bonus to achieve your financial goals!
Work bonuses can help speed up or achieve your financial goals and are a great perk at any company. However, bonuses are not promised in every company or job level.
If you are not sure you are qualified for a bonus at your job ask your manager about work bonuses. Be intentional about using any bonus you receive to propel your financial journey forward!