What do you say to an employer who tries to lower your salary when offering you a bonus incentive?
More details? How does the value of the total package compare? How easy will it be to get the whole bonus?
If the guaranteed portion of my income was going to reduce, there would need to be potential for the variable portion to be much higher. i.e. if I was on $50,000 and it was reduced to $40,000, the potential bonus incentive would need to be at least $20,000 for me to find the reduction acceptable.
Its not like you have a lot of choice when they do this. However, if they don’t pay the variable comp when you meet the goals that go along with it, it is time to move along. Otherwise, you have just taken when I like to call a “Merit Pay Cut”.
I agree that there’s not much you can do; you can try to negotiate it but ultimately it’s the company’s prerogative.
Be aware that if your company has a pension plan, that the pension benefits are usually based on salary; incentives and bonuses are not included.
Just an anecdote from a friend.
Her work is largely commission/bonus based. She makes a reasonable base salary and can make about 50% more through bonuses. However, those bonuses are taxed at a much higher percentage than normal salary. Just a warning, but if the bonuses they are offering aren’t substantially higher you may actually lose money after all is said and done. (This is Ontario, so YMMV.)
It affects your 401k plan, too, and any other salary based savings plans (like profit-sharing.) I quit a job once because I got a promotion (that I worked very hard to get!) and was only given a (very nice) bonus instead of the promised raise.
True in the US too. Your take home pay would go down although your tax refund would go up. If you expect a change like this, you might want to adjust your withholding to compensate.
To be clear, bonuses are often taxed at what is called the “bonus rate” in the US, but that doesn’t mean that your overall tax for the entire year will be higher. It just means that the withholding from a bonus check will be higher than that of a “regular” check. At the end of the year salary plus bonus is used to determine your gross income and your tax is figured based on that number (after credits, deductions, exemptions, and the like are figured in). Bonus income is not taxed any differently than non-bonus income - only the withholding is done differently. The tax on $20,000 regular income + $80,000 bonus income is the exact same as the tax on $80,000 regular income + $20,000 bonus income.
Interesting - even when it all nets out at the end of the year does she wind up paying more in taxes?
In the US, the withholding might be higher on something tagged as a bonus, but when you compute the taxes at the end of the year, that would lead to a higher refund. E.g. regular salary 40,000 and withholding 10%, bonus 10,000 and withholding 20%, leads to a total of 6,000 withheld. Regular salary 50,000, withholding 10%, would have 5,000 withheld. But the ultimate tax bill doesn’t care whether the salary was base or bonus; the whole 50,000 is treated the same. So if the bonus approach is used you’d get that thousand back.
One disadvantage of base+bonus approach is that certain benefits (e.g. disability, vacation, life insurance) are calculated just on the base pay. So if you’re sick, or on vacation, you’ll get your 40,000 but not that extra 10,000.
No, thanks. I’ve actually done this.
More than that. Consider raises. If you get a $50K salary, and get a 5% raise,. you get an extra $2500 for the next year, which will be the base of your next raise. If you have a $40K salary, you’d get only $2000. Over a number of years it adds up. In addition, you lose the value of the $10K for the entire year, assuming the bonus is paid at the end of it. You need to factor that in also.
Bonuses came in to make the payroll flexible with business conditions, and I think they are a good idea in general - much better than modifying the payroll by layoffs. But I’ve never taken a paycut, only a decrease in a raises.
The other factor is how realistic the bonus criteria are. When I worked on one project, there were “bets” with top management about progress, and we’d get all sorts of stuff if we made the goals. We never did.
This is her first year doing taxes with this job where she will not have to add other sources of income into her calculations, so I refrained from commenting on that. Just wanted the OP to be aware that it could be taxed differently.
Is there some sort of odd tax law in Ontario about this? A bonus gets taxed at the incremental rate, but so would a salary increase. My bonuses go into my W2 total with no differentiation from base salary. I’m very interested if things are different in Canada.
In the US the issue is when the bonus (or overtime) is paid. As it has been explained to me (probably simplified), taxes are calculated on each paycheck assuming that amount will be paid for the entire year. So if you normally are in a 20% bracket, get a bonus such that if that was your yearly salary you would be in a 30% bracket, you pay a larger proportion of your income in taxes. Of course if you overpay, the Gov’t returns the money with thanks for the interest free loan.
The solution, if it is one, is for the bonus to be paid in increments throughout the year. Of course that makes it look a lot like salary, so it isn’t something companies like to do.
Withholding I can see, but that’s different from an increase in taxes. Something like this can be adjusted for by changing the number of exemptions to balance things out. If you get too much in a bonus you can make an estimated tax payment.
A similar problem occurs for summer jobs, where withhold is taken out as if for an entire year.
This is correct, and clarifies an earlier post
There is no “bonus rate.” The withholding rate is based on the amount in each check, but exactly the same “regular income” rate structure is used for salary, bonuses, commissions, dividends, interest, etc. The tax code doesn’t care how you earn it (within the context of this discussion; there might be some esoteric exceptions).