Key takeaways

  • Bonuses are a great way to reward employees, but business owners should strive to set up equitable and transparent bonus policies.
  • Tax regulations treat employee bonuses as supplemental wages, and bonus payouts are subject to the Federal Insurance Contributions Act (FICA) and income tax withholding.
  • Companies that declare bonuses before year-end but make payments the following year need to determine when the payments are deductible based on applicable tax and accounting rules.


China Llanos

Digital Content Writer & Editor, J.P. Morgan Wealth Management

Business success often hinges on attracting and retaining dedicated employees. Beyond offering competitive salaries and benefits, business owners can sweeten the pot with employee bonuses. This is a great way to reward employees who’ve helped your business grow – especially if you’re celebrating a profitable year.

Planning early so that you are able to offer your employees a decent bonus can help your business stand out from the pack. According to data from the Bureau of Labor Statistics (BLS), 12% of all U.S. workers have access to an end-of-year bonus.1 In addition to helping you recruit new talent, showing your appreciation for the people who keep your company ticking makes them more likely to stick around.

If you’re a business owner looking to give your staff an extra incentive, it’s worth considering how employee bonuses will factor into your annual budget. Here are a few things to keep in mind as you prepare to spread the kind of joy around the workplace that can only be produced by freshly cut bonus checks.

Develop a transparent bonus program – and budget for it

Bonuses may enhance employee morale and satisfaction but if you’re planning to hand out supplemental checks, you’ll want to put in place an equitable and well-defined bonus policy. Having a transparent system in place can help you avoid tensions between employees who may size up their rewards against those of their coworkers.

There are several ways you could structure bonuses. You might consider giving all employees a similar bonus, such as a week’s worth of wages or a certain percentage of their salary. Alternatively, you could base bonuses on how long an employee has been working with the company or tie them to a performance metric. No matter how you calculate bonus payouts, making sure your employees understand the system can help you avoid any tension.2

As you decide on how much to pay your employees in bonuses, it’s critical to consider the impact on your overall budget. Remember that payroll taxes add to the total cost of giving bonuses. Also, anything you pay out will be above and beyond the employee’s regular salary and benefits, including any matching contributions to your company’s qualified retirement plan.3

The good news is that, unless your employees’ contracts specify the bonus they will receive, the decision on whether and how much to pay out remains up to you. This gives you some flexibility to reward employees without blowing up your budget, striking a balance between boosting morale and protecting your company’s financial health. With this in mind, it could be a good idea to use your company’s revenue projections to create a rough bonus budget at the start of the year, which can then be regularly adjusted based on several factors like actual performance, the performance of your employees and any employee turnover.

Consider the tax implications

For tax purposes, any bonuses you pay out will be treated as supplemental wages – a category that also includes perks like commissions, overtime pay and compensation for unused sick leave. Bonuses and other supplemental wages are subject to income tax withholding and Federal Insurance Contributions Act (FICA) payments.4

As an employer, your share of FICA for bonus payments remains the standard 7.65%. In other words, if you gave out a bonus of $1,000, you would be on the hook for paying $76.50 toward your employee’s Social Security and Medicare.5

When it comes to income tax withholding, you have a couple of options for treating bonus payouts. If you combine the supplemental payment with your employee’s regular wages – without specifying the amount in each category – you should use the same method of determining your withholding that you would apply for a typical pay period.6

However, if you pay the bonus separately or combine it with regular wages but break down the amount of each category, you could withhold at a flat rate, which is set at 22% in 2024, or use the aggregate method.7 If you pay an individual employee supplemental wages of more than $1 million in a calendar year, the excess amount is subject to a mandatory supplemental flat rate of 37% without regard to the employee’s Form W-4.8

Determine when to take deductions

Paying out bonuses around the holiday season or as a year-end incentive can add some complexities to your company’s end-of-year tax accounting. This is because many employers opt to declare bonuses before December 31 but pay them out in the new year.

If you announced bonuses last year but pay them out this year, your company will need to figure out if the payments are deductible in the tax year that your employee earned them or the tax year when you make the actual payment. Generally, bonuses are deductible in the year paid, but in some cases, they may be deducted in the prior year.

If you run a calendar-year business and use accrual-based accounting – and have a properly designed bonus pool and procedures – bonuses may be deductible in the year that they are earned as long as you complete the payout by March 15 of the following year.9 However, bonuses paid to owner-employees are not deductible until they are actually paid, so business owners should pay close attention to the tax impact before issuing themselves a generous bonus check.10

Bottom line

A workforce that feels appreciated and valued is often a key ingredient of a successful business. Offering your employees bonuses may go a long way toward boosting their satisfaction.

As you determine a supplemental incentive program that makes sense for your company, you’ll want to ensure that bonuses are fair and transparent. You should also factor in the total cost of paying bonuses, including payroll taxes, and determine the tax year in which the payouts are deductible. For this reason, planning early – even as early as the start of a new earnings year – can ensure you can reward your employees well without impacting the financial health of your business.

Trusted accounting and tax professionals could be important resources in helping you reward your employees without jeopardizing your company’s profitability or growth potential.



Bureau of Labor Statistics. “What types of nonproduction bonuses are available to workers?” (September 2022).


U.S. Small Business Association. “5 Things to Know about Year-End Bonuses.” (December 2017).




Internal Revenue Service. “Publication 15: (Circular E), Employer's Tax Guide,” pages 19-20. 26 CFR 31.3402(g)-1. (2023).


U.S. Small Business Association. “5 Things to Know about Year-End Bonuses.” (December 2017).


Internal Revenue Service. “Publication 15: (Circular E), Employer's Tax Guide.” (2023).






Internal Revenue Service. “General Rule for Taxable Year of Deduction 26 CFR 1.461-1.” Rev. Rul. 2011-29.


U.S. Small Business Association. “5 Things to Know about Year-End Bonuses.” (December 2017).

Connect with a Wealth Advisor

Our Wealth Advisors begin by getting to know you personally. To get started, tell us about your needs and we’ll reach out to you.

Connect now


This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at for assistance. Please read all Important Information.

Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.

NON-RELIANCECertain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

Legal Entity and Regulatory Information.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.

J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document.  JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.