What is a cash bonus?

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A cash bonus refers to a lump sum of money awarded to an employee, either occasionally or periodically, for good performance. A bonus is paid in addition to the basic wage or salary.

A cash bonus for better than expected performance may be awarded to an individual, division, or the entire organization, depending on the level at which performance goals have been exceeded. Most cash bonuses are paid once a year and can range from a few hundred to a million dollars, depending on the employee’s position and the company.

Cash bonuses can be contrasted with bonuses paid in employer stock or as a gift such as a holiday or something of value.

key takeaways

  • A lump sum is a cash bonus given to an employee for good performance, evaluated annually, and paid near the end of the calendar year.
  • Known as a supplemental payment by the IRS, cash bonds are often subject to a flat 22% tax.
  • Cash bonuses can hurt the economy: High cash bonuses can lead to high demand for luxury items.

Understanding Cash Bonuses

Any type of financial compensation given to an employee above their normal salary is a bonus. Complete your salary. Bonuses can be awarded to employees in a variety of ways, from company stock and property, through paychecks, or in cash. Any bonus, whether in cash or in-kind, is considered a token of gratitude from the employer for a job well done.

The amount of a cash bonus can vary depending on the employee’s job and is usually paid by the company at the end of the year, which is why they are often called year-end or annual bonuses. Because they can be based on performance, they are also called performance bonuses. An entry-level employee can get a few hundred dollars and a manager can get thousands for his service. And you’re not likely to hear of high-level executives earning millions in cash bonuses, either.

A company’s performance is generally related to the amounts of cash bonuses and whether or not they are issued. Cash bonuses may reach their highest levels during an economic boom, but all may decline or disappear during economic downturns.

A cash bonus, like any form of compensation, is taxable. The Internal Revenue Service (IRS) calls supplemental pay bonuses and requires employers to withhold 22% flat tax. The bonus may be offered with related taxes already deducted. Even if the taxes are not collected at the time they are awarded, the increase in revenue will in most cases require a later payment. Criteria for receiving a bonus may vary by organization, perhaps with different payout amounts offered to different members based on seniority, individual contributions, or other characteristics.

Cash bonuses, technically known as supplemental payments, are subject to a flat 22% tax.

Special Considerations

Cash bonuses can have a significant short-term impact on the local economy in areas where the average bonus level is high. For example, in financial centers like New York and London, the demand for luxury items like sports cars can increase dramatically due to high cash bonuses paid when the economy is booming.

Research on the impact of cash bonuses on employee productivity has yielded mixed results. Some researchers suggest that cash bonuses do little to improve employee satisfaction and performance. However, a 2013 report from Harvard researchers showed that workers who received cash bonuses were more productive than those who received a raise, even though they earned the same amount. The researchers concluded that employees who receive promotions only accept that the higher salary is the new current rate for their services. But workers who receive cash bonuses are more likely to see them as discretionary payments rather than mandatory payments,

Cash Bonus Example

Cash bonuses can take many different forms. Some companies inform their employees when they sign their contracts about the possibility of a year-end bonus. Let’s use ABC Company as an example. The company has a commercial team made up of 15 people. Each staff member is responsible for the introduction and maintenance of 10 accounts each. The company may give each employee $1,500 at the end of each year as a cash bonus for achieving their goals. But what about those who do not meet their goals? The company may not give a cash bonus to anyone who does not meet year-end goals, or the company may decide to give a smaller amount to those employees.

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By Cary Grant

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