What Is a Cash Bonus?

A cash bonus refers to a lump sum of money awarded to an employee, either occasionally or periodically, for good performance. 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 targets were exceeded. Most cash bonuses are paid once a year, and can range from a few hundred to millions of dollars, depending on the employee's position and the company.

Key Takeaways

  • A cash bonus is a lump sum of money awarded to an employee for good performance.
  • The amount of a cash bonus can vary based on the employee's job, and is normally paid out by the company at the end of the year.
  • A cash bonus, called a supplemental wage by the IRS, is subject to a flat tax of 22%.
  • Cash bonuses can affect the economy—high cash bonuses can lead to a spike in demand for luxury items.

Understanding Cash Bonuses

A bonus is any type of financial compensation given to an employee above and beyond his or her normal wage. It complements his or her salary. Bonuses may be made to employees in a number of different ways from company stock and ownership, through their paychecks, or in cash. Any bonus, whether it's in cash or in kind, is seen as a token of gratitude from the employer for a job well done.

The amount of a cash bonus can vary based on the employee's job, and is normally paid out by the company at the end of the year, which is why they are often called annual or year-end bonuses. Because they may be performance-based, they are also referred to as performance bonuses. An entry-level employee may receive a few hundred dollars, while a manager may receive thousands for his or her service. And it isn't unlikely, either, to hear about top-level executives receiving millions in cash bonuses.

Company performance generally has a lot to do with the amounts of cash bonuses and whether they're given out at all. Cash bonuses can reach record levels during economic booms, but may dwindle or be eliminated altogether during recessionary periods.

A cash bonus, like any form of compensation, is subject to taxation. The Internal Revenue Service (IRS) calls bonuses supplemental wages, and requires employers to withhold a flat tax of 22%. The bonus may be tendered with the related taxes already deducted. Even if taxes are not collected at the time it is given, the increased income will require later payment in most cases. The criteria for receiving such as bonus may vary by organization, possibly with different payment amounts tendered to different members based on their seniority, individual contributions, or other characteristics.

Cash bonuses, which are called supplemental wages are subject to a 22% flat 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, high cash bonuses that are paid when the economy is booming can lead to a spike in demand for luxury items such as sports cars.

Research regarding the impact of cash bonuses on employee productivity has produced mixed results. Some researchers suggest that cash bonuses do little to improve employee satisfaction and performance. However, a 2013 report by researchers at Harvard indicated that workers who were awarded cash bonuses were more productive than those who received a raise, even though they were earning the same amount. The researchers concluded that employees who get raises simply assume that the higher salary is the new going rate for their services. But workers who receive cash bonuses are more likely to view them as discretionary rather than mandatory payments, and so they tend to reciprocate the gesture by working harder.

Examples of Cash Bonus

Cash bonuses can take many different forms. Some companies even let their employees know when they sign their contracts about the possibility of a year-end bonus. Let's use Company ABC as an example. The company has a sales team made up of 15 people. Each team member is responsible to bring in and maintain 10 accounts each. The company may give each employee $1,500 at the end of each year as a cash bonus for meeting their targets. But what happens to those who don't meet their goals? The company may not hand out a cash bonus to anyone who doesn't meet the year-end goals, or the company may decide to give those employees a lower amount.