Bonus vs. Salary Increase: One is Definitely Better than the Other

I have a confession to make. I’m not actually making $90,000. Whenever I said I was, I was wrongly depending on my bonus to make up the difference between that 90k and my slightly-lower salary at $86k. But hey, my company’s doing great! They’re hiring like mad! We’re blowing past our marketing metrics! So we should be getting that 5% bonus mentioned in our offer letters, right?

Ah, no, as it turns out. Looking closer at my offer letter states that bonus is “up to five percent of your salary,” which I guess I glossed over in the initial reading. My mistake. Also, the marketing team may have been nailing our metrics but that doesn’t mean everyone was. So instead, we’re getting pro-rated bonuses that are smaller than what everyone’s expecting.

Then again, I shouldn’t have counted my chickens before they were hatched. But it got me thinking about jobs in which bonuses are given in place of salary increases, which are becoming more commonplace. My experience with bonuses turned sour, but is that the case in general? In the courtroom of Bonus vs Salary, does salary triumph?

In a word, yeah.

Here’s why:

Bonuses aren’t guaranteed income

By far and away, this is the number one reason why salary is better. A bonus is literally called that because it’s a BONUS to your other job perks. I know I’m guaranteed to clear at least $86,000 because that’s what the company and I agreed upon before I started working for them. I’m also guaranteed certain perks like health insurance and access to a 401(k). What isn’t guaranteed is that bonus, as it depends on the company performance instead of my own.

At some jobs you can finagle it so the bonus is more reflective of you hitting certain metrics. I actually negotiated quarterly bonuses at my prior position that were paid out once I reached certain goals; these included things like “increase site visits by 10%” to give you an idea. But these are exceptions to the norm and still aren’t as great as something you can count on receiving.

Base salary is taxed more favorably

The US tax code is a beast that rivals Cthulhu of R’lyeh as a many-tentacled, terrifying force. I’ve tried to write a post explaining parts of it but confused myself and had to hold off on it. What I do know is that the taxes on your bonus are more than the taxes on your salary. Apparently, the IRS throw your bonus earnings in the “supplemental income” category, which means you pay 22% of your bonus in taxes before paying out for the usual suspects of Medicare and Social Security. Which is a lot of money that actually doesn’t make its way to you. The rules only change if your bonus is over a million dollars, which isn’t a concern for the common Millennial.

When additional bonuses are based on salary percentage

Remember the sneaky wording in my offer letter? Before I drew your attention to the “up to” part of it; now I’d like to draw your attention to the “of your salary” bit. Turns out, several jobs pay out bonuses as a percentage of your salary instead of a specific number. Makes sense, as the folks pulling the highest salaries tend to have more impact on the bottom line than the lowest-paid do.

But all that means is you still want to gun for raises over bonuses. If a bonus is paid out as a percentage of your income, it’s the higher incomes that get a higher bonus. The math just doesn’t favor those who have the smaller salaries.

Bonuses don’t help you legally like a salary does

Another relevant point I pulled from a hiring site: Bonuses do not carry over to other benefits. This argument is related mostly to disability and maternity pay. If insurance and other payments cover a portion of an employee’s salary, the portion they take home via bonuses is not factored into their benefits, which can severely hurt quality of life when an employee is on leave.

I think this would most apply to folks who depend more on their bonus for funding their lifestyle instead of their salary.

Assuming the worst were to happen and you’re suddenly unable to work, your emergency fund is the only helpful part in a sea of dealing with paperwork and disability applications and, most likely, rejections. If coronavirus suddenly mutates and leaves you with lowered physical abilities, God forbid, you’ll want to secure more than less.

Similarly, birthing a newborn is one of the most medically dangerous activities for humans to partake in. Something like one in fifty newborns break their collarbone on the way out of the womb (so their screaming after birth? That’s for more than just a traumatic experience). The person giving birth also faces serious complications, which I was going to mention here but got too horrified to put into words. Just take my word for it that your maternity leave may be necessary for not only bonding with your child, but also to physically recover from the act of birthing.

In both scenarios, the more money the better. If you get more in bonuses then you do in salary, you’ll be up shit’s creek without a paddle if you needed to take leave.

Of course, I’ve never taken a job where the bonus makes up a significant portion of my income. What’s your guy’s take on which is better?