Think twice about spending that bonus

Financial advisor warns bonus could change your tax, job situation

When is a bonus not a bonus? When you fail to think about what that extra income will mean to your overall finances.

I don't mean to spoil the fun. Bonuses, particularly if they recognize your great performance during the year, are rewarding in a number of ways beyond money. It means your work is being noticed and you might rise higher in the organization, always a good thing.

However, in many organizations, bonus compensation has developed and transformed to a new entity, very different from how it was a generation ago. So before you book your dream trip to an exotic beachfront resort, take a closer look.

According to human resources and management consulting firm Aon Hewitt, some 90% of employers have either implemented or are considering something called "variable pay systems" that mean a greater reliance on "incentives, bonuses and cash awards," to reward high-performing employees.

Employers are signing on because it helps them slow the growth of overall payroll, which is the biggest fixed cost in any business. It also offers a way to boost performance among workers at all levels.

What do one-time bonuses or a conversion to a variable-pay system mean for you? Potentially, this could result in changes to your tax situation, the overall value of your employer- and government-based benefits and therefore, your long-term financial picture.

Here are some questions to ask:

What kind of bonus is it? Make sure you understand whether a bonus is a one-time award or a shift to an ongoing bonus system. This is a money and a career question. If you are going to be evaluated under new benchmarks and measurements for work you've done every day, you should fully understand these new guidelines and how you can maximize them in your best interest.

Get qualified advice. A one-time bonus or a long-term change in the way you're being compensated is an important financial event. Consider speaking with a qualified financial planner or tax expert about any bonus news you receive and see how they think you should handle the money.

Keep in mind that the Internal Revenue Service generally considers bonuses as supplemental wages that can be taxed at a higher rate. Check IRS Publication 15 for more detail.

Keep in mind that your salary level, not extra money you get from bonuses or other incentives, provides the basis for calculating your employee benefits and what a lender might offer for mortgages or other credit. In some cases, it might be better to save or invest that bonus than to spend it outright.

Ask questions. Read any paperwork that accompanies your bonus information, write down questions and take them to your employer's designated human resource representative or manager directly.

Be practical, but don't forget the fun. Consider treating your bonus like your paycheck. Evaluate what essential needs should to be addressed first and figure out what you can spend for fun.

Make a change if you need to. As more employers adopt variable pay and performance grading systems, consider issues beyond the money. For example, if you are doing work you love, will meeting new performance targets change how you feel about your job? Are you ready to take on the challenges of a workplace where you're graded and evaluated in a different way than you are used to?

In some environments, new employee compensation methods can be liberating and financially rewarding; in others, it can make it tougher to stay. See where you stand, and if changing jobs might be worthwhile, consider looking for a better opportunity

Bottom line: The way workers are being paid is changing. It's important to understand how one-time or annual bonuses might affect your long-term finances.

Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter:


2 people like this
Posted by Debbie Downer
a resident of Another Pleasanton neighborhood
on Dec 12, 2015 at 5:42 pm

Geesh. What a downer. Come on! Bonus money is still MONEY. Yes you should always determine a bonus and Salary together to determine impacts but... Come on


9 people like this
Posted by Bill
a resident of Pleasanton Heights
on Dec 12, 2015 at 9:41 pm

You might be over thinking this bonus thing.

4 people like this
Posted by wondering
a resident of Stoneridge
on Dec 14, 2015 at 9:45 am

Something to think about: Some of us don't ever get a bonus. This falls into the category of a problem I wish I had. Just saying.

2 people like this
Posted by Steven
a resident of Stoneridge
on Dec 14, 2015 at 10:07 am

Steven is a registered user.

I find it disheartening that people would splurge because of a one time payment. Doesn't anyone take a holistic view of their finances? If you have credit card debt, yet use a bonus to purchase a new TV or take a vacation, you have real problems.

Posted by Name hidden
a resident of Birdland

on Dec 14, 2015 at 12:35 pm

Due to repeated violations of our Terms of Use, comments from this poster are automatically removed. Why?

3 people like this
Posted by amused
a resident of Livermore
on Dec 14, 2015 at 4:14 pm

Interesting way to try to drum up business. A financial planner saying that one should get financial advice when getting a bonus......

Sorry, but further commenting on this topic has been closed.

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