Why You Need a Raise Instead of a Bonus

Though it may be too soon to tell how the recent batch of tax changes affects working Americans, it’s pretty much the consensus that businesses nationwide will benefit from them. And the good news is that some companies are already paying it forward. There’s just one problem: Many businesses are sharing their newfound wealth with employees in the form of bonuses rather than giving out raises.

In an analysis by HR consulting firm Willis Towers Watson, as of mid-January, 88 companies had committed to giving workers one-time bonuses ranging from $150 to $3,000, but only 35 companies had pledged to make adjustments to their minimum wage.

Of course, from an employer perspective, bonuses are often preferable to raises because they’re generally a self-limiting cost. A company can give out bonuses when it has a year of strong sales, and halt that practice during a year in which sales drop. Raises, by contrast, are generally riskier, because once workers get a boost, companies are essentially locked into paying them more for as long as they remain employed. Even if a given business decides not to give raises in future years, that business is still required to keep up with preexisting salaries. Furthermore, because certain benefits, like 401(k) matching dollars, are often tied directly to salary, increasing set compensation can cost companies in other ways.

But while bonuses may be the safer bet for employers, that doesn’t necessarily hold true from a worker’s perspective. And though you’re better off getting a bonus this year than receiving no boost in compensation whatsoever, here are a few reasons you, as an employee, should push for a raise over a bonus.

1. It Could Pave the Way to a Better Salary in the Future

Have you ever been asked, whether during a phone screen or in-person job interview, how much you’re earning or earned in a given role? It’s a question that’s posed all the time*, but when you answer it, you’re supposed to simply talk salary, because bonuses don’t count. Now, imagine you’re planning to apply for a new job next year and currently earn $60,000. If your company decides to boost your salary by $3,000, you’ll get to tell your next company that you’ve been earning $63,000. But if your company hands out that $3,000 in the form of a bonus instead, that extra money won’t help for the purpose of that conversation.

One thing you must understand about salary is that the amount you make today will most likely dictate what you’re able to command in the future. If you let yourself remain content with a bonus in the absence of a much-deserved raise, you could end up limiting your earning potential for the remainder of your career.

*Editor’s note: Depending on where you live, this question may be illegal — learn more here.

2. You May Be More Inclined to Use That Extra Cash Responsibly

We’re all told we’re supposed to save a percentage of our salaries, whether for emergencies or the future. But the so-called rules surrounding bonuses are less clear-cut. After all, if that cash is really extra money, shouldn’t you get to use it for fun purposes rather than feel compelled to save it?

Now here’s the thing: If your finances aren’t great, then the answer is a resounding “no.” No, you shouldn’t blow your bonus money on a fancy gadget or vacation if you’re behind on savings. And incidentally, most Americans are. An estimated 57 percent of U.S. adults have less than $1,000 in the bank, while 39 percent have no near-term savings to show for at all.

Most of us aren’t doing too great in terms of retirement savings, either. Households between the ages of 44 to 49 have just $81,347 stashed away for retirement, on average, while those between 50 and 55 have an average savings of $124,831. And while those numbers are far from impressive, what’s even worse is that nearly half of U.S. households have no retirement savings at all.

All of this boils down to the following: If you get a salary boost, you’re more likely to use that money responsibly than if it were to come in the form of a bonus. And that’s the sort of pressure most working Americans need.

3. Bonuses Are Taxed Less Favorably

When you earn money as a salaried employee, you eventually get used to losing a certain portion of your paycheck to taxes. Bonuses, however, are taxed differently. In most cases, you’ll lose 25 percent of your bonus right off the bat because that payment will be considered supplemental, and therefore subject to a higher tax rate. But that 25 percent doesn’t account for Social Security and Medicare taxes, not to mention state taxes. Therefore, by the time you receive that check, you may come to find that your bonus has been whittled down to something in the ballpark of 60 percent of its original figure. And while you may receive some of that back when you file your tax return, it means you could end up waiting a year or more to get that missing money.

Obviously, if given the choice between a bonus or nothing this year, it would be prudent to opt for the former. But if you have a good relationship with your employer, it pays to make the case for giving out raises instead of bonuses if the option for both isn’t on the table. It’s a move that could end up paying off not just at present, but many, many years down the line.

This article was originally published on The Motley Fool. It is reprinted with permission.

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