End-of-Year Bonus Considerations for Small Businesses

As a small business owner, it’s exciting to reach the hiring stage. Employing other people to help you achieve your mission is a pretty big milestone. Another big one? Having a fiscal year so strong that you can spread the wealth across your team.

While small business bonuses are a wonderful idea, it’s important for business owners to understand the full picture. Before giving end-of-year bonuses, you’ll need to implement a bonus program. This requires a few steps, of course. But we’ve got your back with a deep dive into the benefits, initial considerations, criteria, structure, and more around bonus programs.

Understanding the Purpose of End-of-Year Bonuses

You’ll be hard-pressed to find an employee who won’t love to receive an end-of-year bonus. But there’s more to bonuses than that. They’re a huge morale booster and can show an employee just how much their employer appreciates their hard work. Bonuses are also a fantastic motivational tool. When employees know their work is appreciated and valued, engagement and productivity usually remain high. Plus, when there’s a bonus tied to their performance, they’re more likely to challenge themselves.

Future employees are often motivated by bonuses as well. When given the choice, most candidates would likely choose a company with bonuses over one without. This can give you an advantage in a competitive job market. That being said, the reason behind the bonus should align with your company’s goals, culture, industry, and performance of your employees.

Evaluating Your Financial Situation

Even if you’re excited by the prospect of rewarding your employees, in order to give you need to make sure you’re in a financial place to do so. Avoid jeopardizing your company’s stability by first considering a few aspects of its financial health.

1) Assess Profitability 

First, review all your financial statements to confirm that your business has been profitable throughout the year. Look closely at your revenue, business expenses, and any outstanding debts you might have. With a clear understanding of your financial position, you can better understand if bonuses are doable.

2) Set a Budget

If you’ve determined your business is in a good place financially, you’ll want to set a budget for bonuses. Again, look closely at the numbers to figure out the total amount you can set aside for bonuses without impacting your bottom line. You’ll use this budget as a guideline for distributing bonuses among your employees.

3) Choose a Payment Structure

As you budget, you also need to decide how you’ll structure the bonus payments. Three of the most common types are lump-sum, recurring, and year-end.

• A lump-sum bonus: Sometimes called a spot bonus, this is a one-time, fixed-amount payment. These aren’t usually tied to ongoing performance or a specific time period.

• A recurring bonus: This is paid on a regular basis — think monthly or quarterly. These work well as consistent motivation for ongoing employee performance.

• A year-end bonus: As you might’ve guessed, this is a one-time payment given at the end of the calendar (or sometimes fiscal) year. These are often based on employee performance and company profits.

Some companies might choose multiple bonuses and use different structures for each. For small businesses, the year-end bonus is one of the easiest to begin with. This allows more time for business owners to determine the feasibility of giving bonuses.

Determining Bonus Criteria

You’ve considered financial health, budget, and payment structure. Now, it’s time to determine exactly what warrants an employee to receive a bonus. Clearly outlining bonus criteria is a key piece of the puzzle. It will help you when the end of the year rolls around, and it helps employees get clarity on performance expectations.

Much like payment structures, you have options to choose from. You can award bonuses based on performance (which is quite common). You can also give bonuses based solely on company profits. If those don’t sound right for your company, you’ve got plenty of alternatives.

Performance-based Bonuses

Also called goal-based bonuses, performance-based bonuses are awarded for individual or team achievements. Employee performance is evaluated throughout the year, focusing on key metrics or goals that were met or exceeded. Performance-based bonuses, especially end-of-year bonuses, serve as great incentives for employees to improve over time.

Some companies take performance-based bonuses a step further by recognizing certain areas of performance. Some examples include:

• Project-completion bonuses

• Customer-satisfaction bonuses

• Team or department bonuses

• Peer-nominated bonuses

Regardless of how you specify it for your company, set clear performance metrics. The SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) framework can be helpful to structure the metrics.

Tenure-based Bonuses

There are some businesses that choose to award bonuses based on how long an employee has been employed at the company. These are known as tenure-based bonuses, longevity bonuses, or retention bonuses.

Employers who choose this approach recognize the value of long-term commitment and loyalty. Some companies choose to offer different bonus tiers based on the length of an employee’s tenure. The longer the employee remains at the company, the larger their annual bonus becomes.

Company-wide Bonuses

Bonuses don’t always have to be tied to performance. In some cases, employers decide to distribute bonuses evenly among all their employees. This approach can foster a strong sense of teamwork.

This can look different from company to company. Some choose to keep it simple with a profit-sharing bonus that shows thanks for the teamwork required to reach success (and works great for end-of-year bonuses). Other companies prefer to offer stock options or equity grants to give employees the chance to own a share of the company.

Communicating Bonus Decisions

After all the planning and documentation, you’re ready to launch your bonus program. Launching your program requires a few things — transparent communication, clear metrics, flexibility, and teamwork.

Announce Your Bonus Program

When you announce the news of your bonus program, you’ll want to do a few things. First, make sure your announcement is given over the right channels. You want to ensure the announcement reaches as many employees as quickly as possible. Make sure to communicate the reasoning behind the bonus program and how much your employees are appreciated.

It’s also a good idea to drive home the fact that teamwork is still important. Performance bonuses can sometimes lead to competition between employees. While some competition is healthy, strong collaboration and peer support is just as important.

Address Employee Concerns

Even the most clear communication can be misunderstood. It’s good to be prepared to address concerns or questions that employees might have about the bonus program. Make sure employees know their thoughts are welcome — encourage open communication and provide feedback on performance if needed.

You may also want to address priorities with employees, too. Members of your team may focus too hard on the areas of their performance that are tied to your end-of-year bonus. Highlight the fact that all aspects of an employee’s role are important and valuable to the company’s growth.

Remain Transparent & Flexible

Through the announcement and subsequent questions, it’s crucial that you remain transparent. Help your employees fully understand the bonus structure, criteria, and expectations around their performance. This will help your bonus program become more successful in the long run by motivating employees, reducing confusion, and building trust.

Flexibility is key here as well. If employees provide feedback on changes that would improve the bonus program, take the time to consider them. The bonus program serves as an incentive, a reward, for your team. If it’s not serving them well, it’s not serving its purpose. The same goes for the company. If business goals change and landscapes shift, you may need to restructure the program. The important thing is to continue communicating with your employees through any changes.

Tax Implications of Bonuses

Small business owners are no strangers to tax implications. When it comes to bonus programs, taxes are a necessary factor. And that’s not just for employers — employees are subject to tax implications as well.

Like regular wages, bonuses are considered fringe benefits and are subject to federal and state taxes. Employers are required to withhold the appropriate taxes and report any bonuses on employee W-2 forms.

• Employer responsibilities: As an employer, you need to maintain compliance with tax regulations when distributing bonuses. It can help to consult with a tax professional to ensure withholding and reporting are both accurate.

• Employee considerations: Your employees need to know that bonuses affect their taxable income. You can encourage employees to plan for the tax impact by adjusting their withholdings or setting aside funds for future tax payments.

Alternatives to Monetary Bonuses

If your company’s financial health isn’t conducive to end-of-year bonuses, fear not. There are many ways to recognize employees, and non-monetary rewards can be just as effective in boosting morale and showing appreciation.

Additional Paid Time Off

Employees love their paid time off (PTO). Employers that offer extra PTO enable their employees to recharge effectively. Flexible work arrangements can also be an attractive reward. For employees with a great track record and strong work ethic, their proven performance could warrant flexibility in their working hours.

Professional Development Opportunities

Making time for professional development can be tough for employees. However, if employers make a point to create development programs that focus on the growth areas employees are excited about, that can make a huge difference.

Employers that prioritize professional development for their employees can show their teams they’re committed to their long-term success. This can be done through training and certification programs, interactive courses and workshops, or industry conferences.

Gift Cards or Vouchers

If you’re set on giving something gift-like, consider gift cards or vouchers. They’re easy to find, easy to give, and don’t usually expire. Plus, the options are endless, making it easy to personalize. As an alternative, you could also give gift certificates for wellness services or tickets to a local event. 

However you choose to reward your employees at the end of the year, your actions will speak loud. When employees feel truly appreciated, they tend to work hard, perform well, and stick around. By implementing an end-of-year bonus program at your company, you can set your company up for growth through consistent employee performance and improvement. 

How Justworks Can Help

Whether you are able to give bonuses or not, offering health benefits is a crucial aspect of being a competitive small business. Justworks makes accessing competitive benefits easy with plans that can scale as you grow. Offer your employees large-group coverage from national and regional carriers, 401(k), mental health and fitness benefits, primary care, fertility and family-building benefits, and more. 

Join other small businesses like yours that want top-tier benefits for top-tier talent. Justworks is ready to help you benefit from a happier, more productive team. Get started today!