What is a bonus?
A bonus is a non-structural reward, often given for exceptional performance or achieving specific goals. An end-of-year bonus or year-end bonus is not considered a bonus if it is included as one of the fixed secondary employment conditions in your contract. Allowances and expense reimbursements are not bonuses either.
Employers decide whether to establish a bonus scheme, its conditions, and the amount. Bonuses are usually based on performance but can also be discretionary, meaning measurable standards are not predetermined.
Bonuses can be either individual or collective. However, there should be no discrimination among employees. An employee should not be excluded, for example, due to part-time work or pregnancy.
What types of bonuses are there?
There are roughly two types of bonuses: individual and collective.
- Individual Bonuses: The performance bonus is the most common individual bonus. You receive it only if you achieve the pre-defined individual target, for which you are entirely responsible. Some roles, like sales and account management, commonly involve working with targets, and bonuses are paid monthly. Annual goals can also be set.
- Collective Bonuses: An example of a collective bonus is the team bonus, earned together with your team for successfully completing a specific project within the deadline. The team bonus is also a performance bonus.
Profit-sharing is another form of collective bonus. At the end of the year, all employees share in the company’s profits. This can be a fixed amount or a percentage of the gross salary.
The end-of-year bonus or 13th-month bonus is often included in your contract as a fixed secondary employment condition. Strictly speaking, this compensation is structural, but it is often seen as a bonus because it is an extra on top of your salary.
How much tax do you pay on a bonus?
You pay more tax on a bonus than on your monthly salary, for two possible reasons: the progressive tax system and the absence of the tax credit on bonuses. The bonus is added to your regular salary and always falls into the highest applicable tax bracket for you. Additionally, because a bonus is a form of special income, the tax credit does not apply, resulting in higher tax payments and a lower net amount received.
Summary
A bonus is a non-structural reward for exceptional performance. Employers can establish schemes, linking bonuses to individual or collective achievements. Individual bonuses, like performance bonuses, depend on meeting predefined targets. Collective bonuses, such as team bonuses or profit-sharing, result from collaborative efforts. Fairness is crucial, and discrimination should be avoided.
The end-of-year bonus, often considered structural, may have tax implications. Bonuses generally incur higher taxes than regular salaries due to their addition to the highest tax bracket and the absence of tax credits. Employees should be aware of the diverse bonus types and associated tax considerations. Understanding these aspects is essential for navigating bonus complexities effectively.