Discretionary Bonus

A discretionary bonus is a voluntary payment made by employers based on factors such as performance or achievements. Unlike regular bonuses, which are often outlined in contracts, discretionary bonuses are optional and determined at the employer's discretion.

How is a discretionary bonus calculated?

There’s no set formula for calculating discretionary bonuses. Employers determine the method and amount based on factors like company profits, employee performance, or length of service. Some may calculate it as a percentage of salary or revenue, while others may offer a flat amount to eligible employees.

Is a discretionary bonus mandatory for employers to pay?

Employers are not required to pay discretionary bonuses. They have the freedom to decide if, when, and how much to offer based on business conditions. However, once a bonus is announced or promised for a specific pay period, employers are expected to honor their commitment.

How does a discretionary bonus impact an employee's taxable income?

Discretionary bonuses are considered supplemental wages and are fully taxable. They must be reported on the employee's W-2 form and are subject to federal income tax, Social Security, Medicare, and applicable state taxes. The final tax liability depends on the employee’s total income and tax situation.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.