Signing Bonus: Definition, How It Works, and Taxes

What Is a Signing Bonus?

A signing bonus or sign-on bonus is a one-time lump-sum payment offered to a prospective employee as an incentive to accept the job. Once offered mostly to star athletes and software wizards, the signing bonus was adopted by many businesses, including fast-food outlets and warehouses, at the end of the COVID-19 pandemic when they found themselves short-staffed and competing for employees.

A signing bonus may consist of a one-time payment or company stock options. In general, businesses offer signing bonuses to highly qualified candidates who may be considering job offers from other companies.

According to economist AnnElizabeth Konkel of the Indeed Hiring Lab, posts that advertise a hiring incentive more than doubled between July 2020 and July 2021, as did searches for the phrase "hiring bonus."

How Signing Bonuses Work

Companies often use incentives to hire and retain the best talent. One of these incentives is called the signing bonus. It's offered to prospective new hires in addition to any other compensation they may receive.

So, in exchange for signing an employment contract with the company, a new employee may receive a lump-sum cash payment or stock options on top of their regular salary, bonus, vacation, and any other benefits noted in their agreement. A signing bonus may be as much as 10% or more of the potential hire’s first-year base pay.

Employers may offer this bonus to a new hire as a way to make up for any benefits they may lose when they leave their old job. Signing bonuses may also be a means for the company to make up for shortcomings in the overall salary they can offer under their current pay structure.

For instance, if a potential hire’s expectations for the role are above what the company pays to other workers in that same position, a signing bonus can be used as a short-term way of granting them the type of salary they desire.

Employees are often encouraged not to disclose details of their compensation to their coworkers—some even come with a confidentiality agreement. That's because employees who are promoted from within may not have the same benefits offered to them even though they would be doing the same job as the new, external hire.

There is also some debate on the effectiveness of signing bonuses, especially in instances wherein the new hire applied for the job out of their existing desire and should not need more coaxing to accept the position. If the recipient of a signing bonus quits within a short time after accepting the position, there may be a good chance they will have to return all or a pro-rated portion of the bonus.

Special Considerations

Signing bonuses, like other types of bonuses, often appear to be a major windfall, but because the money is taxed at the recipient's marginal tax rate, much of the bonus will end up going to the employee's federal and state government. An individual who receives a $10,000 signing bonus and is in the 22% federal tax bracket will pay $2,200 of the bonus in taxes, leaving only $7,800. In most states, state income tax would further lower the value of the $10,000 bonus.