Year-end bonuses in 2023 disappoint with an average of $2,145, down from $2,730 in 2022, as per a Gusto report. The job market stability and employer efforts to cut costs contribute to smaller bonuses. About 66% of employers awarded year-end bonuses in 2023, the lowest since pre-pandemic 2019.
The smaller bonuses prompt considerations for handling taxes and spending wisely. Large bonus checks may push individuals into higher tax brackets, requiring careful planning. Employers use either the percentage method or aggregate method for bonus tax withholdings. The bonus could lead to additional taxes, and adjusting W-4 forms may be necessary for future years.
Strategies to reduce tax burdens include working with employers to defer bonus payments to the next year or maximizing annual retirement contributions to 401(k) plans or IRAs. Employees can also contribute to Health Savings Accounts (HSAs) to reduce taxable income. However, the Gusto report reveals fewer workers received bonuses, contrary to another analysis, highlighting discrepancies in the data.
Balancing debts, building emergency savings, and considering investments are essential when deciding what to do with year-end bonuses. Experts suggest paying down high-interest debts, ensuring adequate emergency savings, and cautious stock market investment, recommending short-term Treasury investments as an alternative. Careful planning and financial strategies can help individuals make the most of their year-end bonuses, even in the face of smaller average payouts.