What is a Year-End Bonus?

A year-end bonus is extra money given to an employee, typically as a reward for helping the company achieve financial goals.

How Does a Year-End Bonus Work?

Let's say Company XYZ's goal this year was to earn 5 cents per share. On December 31, it closes the books on the year. Two weeks later, after the accounting has been completed, the company declares that its earnings for the year were 6 cents.

Because the company beat its goals, it decides to reward certain employees who played particularly important roles in beating the goal. These employees receive a check for, say, $10,000 as a thank you. Because this money comes near the end of the year, we call this a year-end bonus.

Employees typically receive year-end bonuses at the option of the company. Sometimes there are written goal plans whereby employees know in advance that if their personal performance or particular aspects of the company's performance exceed certain goals by a certain amount, a year-end bonus will occur for a certain amount. In other cases, employers give bonuses on a more arbitrary, personal basis. In yet other cases, year-end bonuses are part of employment contracts for key employees (such as CEOs) and have predetermined parameters or amounts.

Why Does a Year-End Bonus Matter?

Year-end bonuses are intended to be motivational tools that encourage employees to keep goals in mind and take action in their everyday work to help the company achieve those goals.

It is important to note, however, that year-end bonuses are generally taxed as income, which means a $10,000 bonus can easily become a $6,000 bonus if the recipient's federal and state tax rates total 40%.