Set Up Profit Sharing for Your Employees

by Craig Anthony

1 min read

In a profit sharing plan, a business owner distributes a percentage of the total company profits to employees, basically as an additional work benefit. Typically, total profits for a company are modeled out for the year, including employee salaries and bonuses, and then a common range of the net profit is allocated across all employee profit sharing plan accounts. This total allocation is usually around 5% of total profits. Benefits of a profit sharing plan for employees include increased motivation and productivity. Employees focus on overall company profitability as they know it will trickle down to their accounts throughout the year. These types of plans also increases commitment and company loyalty. Beyond the increased profitability, employers may gain certain tax advantages depending on the type of plan. Basically, there are two ways to go about a company-wide profit sharing plan. The first is to issue cash bonuses, pro rata to employees based on company performance over a certain period of time. Annual profit sharing bonuses are common, but quarterly and monthly versions also work. The other version is to deposit the profit sharing amount into an employee account, retirement or otherwise. Usually in the latter case, a vesting schedule is applied.

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