In today's business environment, attracting top talent and employee retention depends on much more than a salary. Because employee loyalty is influenced by much more than money.
Research shows that employees care more about things like your company culture, benefits, bonuses, mission, vision and values.
Like benefit packages, bonus pay can be used as an important tool in keeping and attracting the best staff. A competitive bonus pay structure can also help with increasing productivity and keeping staff engaged.
Many businesses pay their staff bonus pay and benefits in addition to their regular wages and salaries. If your business does not, it may be time to reconsider your stance on it.
In this article, we'll explain in detail how bonus payments work, bonus tax rates, and how to calculate bonuses for your employees.
What is bonus pay?
Bonus pay is a sum of money or additional compensation paid to an employee beyond their salary. They're usually not guaranteed and are a way of rewarding employees when a specified goal is reached.
It's common to distribute bonuses monthly, quarterly, annually or sometimes as a one-off. Bonuses are usually cash payments, but in some cases, shares, extra days off, and early workday finishes can also be used as incentives.
It's important to explain the terms of your bonus structure in employees' employment contracts so they fully understand what they need to do to get a bonus.
Why do companies pay bonuses?
Many businesses pay employee bonuses to stay competitive. When other similar companies provide bonuses to their current employees, it's hard to be the odd one out. Failure to give your staff bonus payments when they know they can get it from other businesses willing to hire them can be a one-way ticket to losing valuable talent. That's why one of the top reasons businesses offer employees bonuses is to retain key employees.
Another reason to pay your employees bonuses is that it's a great way to attract hard workers. When your business is known to do things like offer signing bonuses, you're likely to get more job applications from top candidates.
To cap it off, perhaps the best reason to offer your employees a bonus is to motivate them to work hard so your business succeeds. When staff know they'll get extra money or be rewarded when they do well, they're more likely to work hard and be more productive consistently.
It's important to note that bonuses shouldn't be the only way you motivate your employees to work hard. Bonus payments shouldn't replace training, effective management, healthy work-life balance and other perks and benefits.
What are the benefits of a bonus?
Offering a bonus can increase productivity. Financial incentives are a great way to improve employee morale, especially around holidays. Here are a few benefits you can expect to gain after giving bonuses to your employees.
Increased motivation Giving employees extra cash or gifts encourages them to work harder at their jobs. Motivating employees with the promise of something more than their usual pay is a great way to maintain top performance consistently.
Retention bonuses are another way to retain key employees and keep them from leaving your business. It also helps you maintain a competitive edge over similar businesses that may want to poach your best employees.
- Improves team collaboration
Giving bonuses to employees also helps build a stronger team. Knowing a team bonus is at stake makes employees work better together, which results in more productivity and profits for you. It also builds a stronger work culture and communication as every team member feels valued and carried along by their team.
- Sets clear targets for the business
Bonuses also help keep a business accountable to meet its targets. Knowing you've promised to offer retention bonuses, referral bonuses, signing bonuses, or milestone bonuses is enough to make sure you hit your profit targets and company goals, so you have enough revenue to allocate to bonuses.
What types of bonuses are there?
There are many types of employee bonuses, and they usually depend on unique circumstances, like
- discretionary and nondiscretionary bonuses
- the business itself
- the country they operate in or
- the level the employee is at
- There can also be individual and team bonuses
The most common type of employee bonuses
Holiday bonuses are usually given to employees at the end of the calendar year during the holiday season. In some countries like Mexico and El Salvador, holiday bonuses are mandatory for all staff. It is also unofficially referred to as the 13th salary or Aguinaldo.
Businesses give their staff cash as a percentage of their annual salary or holiday gifts like turkeys. It's a great way for businesses to show their staff gratitude and gain loyal employees.
A referral bonus is given to encourage existing employees to recommend talent to join the business. It's common to use this as an incentive for employees to help fill hard-to-fill roles or high-ranking positions.
These bonuses are usually paid out when the new hire has stayed with the business for a specific period. It can also help reduce recruitment costs as it often costs less to pay a bonus than to go through the entire recruitment process from scratch.
Retention bonuses are offered to employees as a way to keep them with the business. When an employer sees an employee as extremely valuable, usually when there is restructuring, a merger or acquisition, they'll offer an attractive sum to convince the employee to stay with the business.
You can also offer retention bonuses when another business is trying to poach your employee with a more attractive offer. Retention bonuses are similar to a signing bonus, which is usually given to new hires as part of a welcome package.
Annual bonuses are similar to profit sharing as they're paid to key employees according to how successfully the business performs. It's a yearly bonus, and when a business has a good year, employees get large bonuses, or when it's been a bad year, there may be no bonuses.
Some of these types of bonuses can be a percentage of the employee's salary, dependent on their role in their department, or if they made any specific contributions to the business' success. It's also usually given at the end of the year to make sure employees stay with the business for longer and contribute more to the company's performance in the coming year.
A spot bonus payment is usually a one-off payment of a lump sum or incentive given to employees who go above and beyond the company's performance targets.
Some examples include rewarding employees for working extra hours or for taking creative steps to improve on business goals with an early finish, gift cards, or extra days off.
How does bonus pay work?
Most bonuses are discretionary and aren't guaranteed. As the employer, manager or supervisor, you have the capacity to decide the value of a bonus and who gets one. Make sure your bonus structure is clear and easy to understand, as it'll help to manage employee expectations. As mentioned earlier, you can do this by outlining the terms and conditions for getting a bonus in their employment contract.
Bonuses are usually performance-based but can also be based on company profits.
As an employer, you should report any bonuses you pay on a T4 bonus pay slip. More information on this can be found on the Canadian Government website. You should use your T4 pay slip to report the following:
- taxable benefits
- wage deductions
- vacation pay
As mentioned earlier, bonuses are additional compensation and are separate from salary. When advertising for a role, you should advertise the basic salary with any On-Target Earnings (OTE) separately.
If you advertise bonuses as integral to compensation, employees could feel misled if you end up withholding the payment without reasonable grounds. You risk facing litigation for damages and for the loss of a discretionary bonus.
Are bonuses taxable in Canada?
Yes, any bonuses or incentives you pay your staff are taxable to the same level as their usual taxable income. In Canada, employers are required to deduct Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums and income tax (federal and provincial) from bonuses. Along with other additional amounts paid to employees.
When you’re producing your T4 pay slip, you need to clearly state the amount of tax deducted on bonus pay that you are paying for your employees. The only way a bonus payment will not be taxed is if it's paid directly into an RRSP account.
If you deduct incorrectly, you can be fined 10% of the amount not disclosed. As per (Canadian Government), this is raised to 20% if a second offence is committed in a calendar year.
At what rates are bonuses taxed in Canada?
Let's look at the tax rates of a few provinces to get an idea of how much taxes to deduct on employees' bonuses.
Federal tax rates for 2023:
- 15% on the first $53,359 of taxable income
- 20.5% between $53,359 and $106,717 of taxable income
- 26% between $ 106,717 and $ 165,430
- 29% between $ 165,430 up to $235,675
- 33% of taxable income over $235,675
Provincial tax rates for 2023:
- 5.05% on $49,231
- 9.15% on $49,231 to $98,463
- 11.16% on $98,463 to $150,000
- 12.16% on $150,000 to $220,000
- 13.16% on $220,000 and above
- 10% on up to $142,292
- 12% on $142,292 to $170,751
- 13% on $170,751 to $227,668
- 14% on $227,668 to $341,502
- 15% on $341,502 and above
- 5.06% on up to $45,654
- 7.7% on $45,654 to $91,310
- 10.5% on $91,310 and $104,835
- 12.29% on $104,835 to $127,299
- 14.7% on $127,299 to $172,602
- 16.8% on more than $172,602 and $240,716
- 20.5% on $240,716 and above
How to gross up a bonus
A gross up is an additional amount of money added to the bonus to cover income tax owed by the recipient.
There are three simple steps to follow when grossing up an employee’s bonus. Remember, percentages must be converted into decimals.
- Add up all federal and provincial tax rates.
- Subtract the total tax rates from the number one (one – tax = net percent)
- Divide the net payment by the net percent (net payment \ net percent = gross payment)
Get help with pay and benefits today with BrightHR
Offering bonuses is just one of the many ways to encourage employees to do their best work. It's a great way for them to get additional income for things like starting a new position, exceptional performance or getting a new job title. Bonuses could be a motivating factor for staff to work harder, which is always great for business strategy.
There's a lot to consider when putting together your bonuses and benefit packages, and the costs of having separate employee benefits can quickly add up.
But with employee benefits built into our award-winning software, we have made it easy and cost-effective to implement employee benefits while transforming your people management.
With BrightHR, you can:
- Implement an employee discount scheme
Our exclusive online marketplace, BrightExchange, allows you to give your employees access to thousands of discounts and unmissable offers without any extra costs.
Plus, you can advertise your business on the platform as many times as you want to 1 million potential customers all over the world.
- Engage and motivate your staff with Praise
Empower and incentivize your team with our employee recognition platform.
We've made it easy to boost productivity and morale with our Praise system, which encourages teamwork and allows you to spot and celebrate top performers instantly.
- Empower your staff with professional development
Support employee development with BrightLearn. Easily develop and upskill your staff without the hefty training costs.
And give your staff access to interactive learning with course completion certificates and a Learning Management System that helps you track staff progress.
A well-defined bonus package will keep your staff happy and motivated. But if you get it wrong, you can end up spending money on rewards that go unused.
So, what are you waiting for? Discover how BrightHR can save you money with the right rewards and transform your people management today by booking your free demo.
Have a question?
Ask away, we’ve got lightning fast answers for Canadian business owners and employers powered by qualified experts.