What Is a Year-End Bonus?

The term year-end bonus refers to a form of compensation paid by employers to their employees in addition to their wages or salaries. Put simply, a year-end bonus is a reward that companies pay their workers. The amount paid can vary but is usually based on an employee's position and salary. It is commonly tied to performance metrics, which means it can depend on whether certain milestones are met. Year-end bonuses may be made in different forms, including lump-sum payments in cash, to reward individuals for their hard work and dedication.

Understanding Year-End Bonuses

Compensation comes in many forms. Depending on the nature of the work and the type of company, employers may offer their employees salaries, wages, commissions, retirement plans, health benefits, stock options, and tips. Another type of compensation is the year-end bonus, which may also be called an annual or Christmas bonus.

Year-end bonuses are offered by companies of different sizes, from small businesses to large multinational corporations. As noted above, it is normally tied to an employee's performance over the calendar or fiscal year. So employees who meet their sales quotas or other metrics may qualify for one. In some cases, anyone who exceeds their goals may be entitled to higher bonuses. It isn't uncommon for top executives and employees of financial firms on Wall Street to receive large bonuses at the end of the year.

Year-end bonuses are often paid in cash as lump sums. Some companies, though, may choose to compensate their employees in other ways. This may include supplemental vacation days, gifts, or of stock. Bonuses fluctuate depending on the economy and the year's performance, but in most years the amount is substantial.

Some companies may include these bonuses in their employees' contracts to encourage consistent results. Contractual year-end bonuses are more often offered to executive management when they are hired or promoted, and might not be tied to the company’s performance at all. In this capacity, the bonus can serve as a hiring and retention tool to keep key personnel on board with a company when job openings at rival companies offer higher base salaries.

Special Considerations

Companies and employees may choose to defer payment of a year-end bonus until the next year. So rather than receiving it in December, an employee may receive their bonus in January or February. This option allows workers to push any additional tax burden to the next year. So although the employee qualifies for the bonus this year, the tax consequences don't apply until they receive the bonus the following year. This allows an employee to plan for the windfall at the end of the next year.

How to Use a Year-End Bonus

• Spend it. This is the first inclination that people have when it comes to their bonuses. Because it's a reward for good performance, you may be tempted to go shopping and make big purchases, whether the payout is big or small. Maybe you want a new TV or need a new laptop. Or you could use it to make those much-needed repairs on your car.
• Pay down debt. This is extra cash that may not have had, so it's always a good idea to clear your debt. You can pay down your credit cards, and student loans. You may even choose to make a prepayment toward your mortgage to cut down your principal balance.
• Put it into savings. If you have little to no debt, consider setting your bonus aside into a savings account, a certificate of deposit (CD), or another investment vehicle. If you have room, you may choose to put it into and top off your retirement account.