Most annual bonus plans follow the same three steps: start from a target, adjust it for performance, and prorate it for the part of the year you were eligible. Your plan document has the exact rules, but the arithmetic is usually this.
Step 1: The target
The target is what you would earn at 100% payout. It is either a set amount or a percentage of base salary.
Target = base salary × target %
An 8% target on a $72,000 salary is $5,760.
Step 2: The payout
Company results, team results, or your own rating scale the target up or down.
After payout = target × payout %
At a 90% payout, $5,760 × 0.90 = $5,184.
Step 3: Proration
If you joined partway through the year, many plans pay only the months you were eligible.
Bonus = after payout × months eligible ÷ 12
For 6 eligible months: $5,184 × 6 ÷ 12 = $2,592.
| Step | Amount |
|---|---|
| Target (8% of $72,000) | $5,760.00 |
| After 90% payout | $5,184.00 |
| Prorated for 6 months | $2,592.00 |
Why the bonus deposit looks smaller
The amounts above are gross. Bonuses are usually treated as supplemental wages, and withholding on them can differ from a regular paycheck. The deposit is also reduced by Social Security, Medicare, and any state tax. To check your withholding over the year, the IRS Tax Withholding Estimator is linked below.
Bonuses and overtime
For nonexempt employees, the type of bonus matters. The Department of Labor explains that a bonus is discretionary, and can be left out of the regular rate, only when both the fact of payment and the amount are at the employer’s discretion and are not promised in advance. Bonuses promised for meeting goals, such as production or attendance bonuses, are nondiscretionary and generally must be included in the regular rate used for overtime. The label an employer gives a bonus does not decide this on its own.
See how overtime pay is calculated for a worked example of a bonus changing the overtime rate.
Tools
- Bonus calculator: target, payout, and proration in one step.
- Raise calculator: compare a bonus with a permanent raise.
- Gross pay calculator: see a bonus inside a full paycheck.
Sources
- U.S. Department of Labor, Fact Sheet #56A: Overview of the Regular Rate of Pay Under the FLSA
- Internal Revenue Service, Tax Withholding Estimator
About this guide. Written for US employees as general information, not legal or tax advice. Rules can differ by state, employer, and contract. See our methodology and disclaimer.