Profit Sharing vs. Cash Bonus

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Topic Author
AW89
Posts: 15
Joined: Tue Mar 31, 2015 9:22 am

Profit Sharing vs. Cash Bonus

Post by AW89 »

30 yrs old. Live in TX. Have wife who doesn't work & three young kids. I work for a large (mega-corp) company that is (my group at least) oil & gas related. While we have unfortunately had to lay off nearly 20% of our workforce I have recently been approached with a promotion to move to a new business unit (still O&G related).

While the majority of the company has been put on a 12 month salary freeze, furloughs, etc... I am going to receive a 11%+ increase in base salary bringing my base to $120K from $107K. While I feel I could potentially try & negotiate this more I do know that internal promotions are typically 10% & given the current economic environment (especially within the O&G industry) I am not sure it is worth pursuing.

I have been given the choice of staying on my current payroll structure or moving to the new groups structure. Currently I receive a profit sharing bonus of 6-7%.... It is pretty much guaranteed to fall within this range but it does go directly into my 401K in which I can't touch until I am retirement age. On the new groups plan I would have a centerpoint cash bonus of $11,000/yr based on company performance. The minimum multiplier is 0.35 while the max is 2.0.

So on profit sharing it is pretty much guaranteed contribution between $7200-8400 year (based on current salary), with the cash bonus the range is $3850-22000.

This year the group I am transferring to is going to receive the minimum 0.35 multiplier. Of course, nobody forecasted the pandemic & O&G downturn so it makes sense. Next years plans are of course much more in line with today's current environment but some stretch targets on cost cutting measures still needed to implement (which we have a plan for just need to execute).

A little more about me & my family....

Currently today i am only contributing 10% of my base salary into 401K. It was higher for a while but after my wife quit working when our third kid was born i wanted to increase cash position in emergency fund & lowered contributions. Company match is 3% + the annual 6-7% profit sharing contribution. All vanguard low cost index funds.

I currently have $225K in my 401K, no debt outside of mortgage ($230K owed on house worth ~$300K) @ 3.25% fixed rate. We have about $3K owed on car we purchased 3 years ago and this will be paid off in 3 months or less.

No other debt. Have around $28K between kids 529 plans saved so far. Have just shy of $30K cash saved in marcus savings account which would cover 6 mo + expenses.

So with all of that being said, what would you choose? Stay on current profit sharing plan or move to cash bonus plan?

In my mind, the profit sharing is good for people who aren't disciplined to save for retirement but the upside of the cash bonus is much greater than profit sharing so it comes down to classic case of risk/reward. I have thought about increasing my current 401K contribution to max out annual contribution & I would essentially keep my current take home pay the same while the increase in 401K contribution would cover the previous profit sharing contribution & whatever the cash bonus ends up being at the end of the year is just gravy on top.

Thoughts?
Last edited by AW89 on Fri Aug 28, 2020 12:07 am, edited 1 time in total.
vtjon02
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Re: Profit Sharing vs. Cash Bonus

Post by vtjon02 »

I’d take the profit sharing plan and I don’t think it’s even remotely close given tax implications, ability to get more money into tax deferred accounts and low target for current year under cash plan.
AlohaJoe
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Re: Profit Sharing vs. Cash Bonus

Post by AlohaJoe »

AW89 wrote: Thu Aug 27, 2020 11:29 pm Of course, cash bonus will be taxed at ~40% upfront....
Why on earth would your bonus be taxed 40%? The top marginal tax bracket is 37% and only kicks in once you are earning over $600,000 a year. You're making $120,000 a year. Your marginal tax bracket is 22%.
Topic Author
AW89
Posts: 15
Joined: Tue Mar 31, 2015 9:22 am

Re: Profit Sharing vs. Cash Bonus

Post by AW89 »

AlohaJoe wrote: Thu Aug 27, 2020 11:59 pm
AW89 wrote: Thu Aug 27, 2020 11:29 pm Of course, cash bonus will be taxed at ~40% upfront....
Why on earth would your bonus be taxed 40%? The top marginal tax bracket is 37% and only kicks in once you are earning over $600,000 a year. You're making $120,000 a year. Your marginal tax bracket is 22%.
I very well could be wrong... But i found a few online calculators where you typed in your current salary/paycheck information & then entered your expected bonus & it gave me expected take home amount of the bonus and they were all around 60% of total.

I will edit my OP to remove that as I agree it is not something I am certain about considering I haven't received a routine cash bonus in my career so far.
Topic Author
AW89
Posts: 15
Joined: Tue Mar 31, 2015 9:22 am

Re: Profit Sharing vs. Cash Bonus

Post by AW89 »

vtjon02 wrote: Thu Aug 27, 2020 11:56 pm I’d take the profit sharing plan and I don’t think it’s even remotely close given tax implications, ability to get more money into tax deferred accounts and low target for current year under cash plan.
Thanks for your thoughts.

I should add to clarify, our current fiscal year ends 9/30 & I will for sure be receiving my current profit sharing plan. My new role won't be effective until Oct 1 which is the start of our FY21. So what I am deciding on now is my bonus for Fall 2021.
runner540
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Re: Profit Sharing vs. Cash Bonus

Post by runner540 »

AW89 wrote: Fri Aug 28, 2020 12:06 am
AlohaJoe wrote: Thu Aug 27, 2020 11:59 pm
AW89 wrote: Thu Aug 27, 2020 11:29 pm Of course, cash bonus will be taxed at ~40% upfront....
Why on earth would your bonus be taxed 40%? The top marginal tax bracket is 37% and only kicks in once you are earning over $600,000 a year. You're making $120,000 a year. Your marginal tax bracket is 22%.
I very well could be wrong... But i found a few online calculators where you typed in your current salary/paycheck information & then entered your expected bonus & it gave me expected take home amount of the bonus and they were all around 60% of total.

I will edit my OP to remove that as I agree it is not something I am certain about considering I haven't received a routine cash bonus in my career so far.
Withholding isn’t the same as taxes owed.
Employers are supposed to withhold 37% on bonuses over $1 million.
Your bonus is taxed at whatever your marginal rate is (12 or 22% depending on total comp and deductions). SS tax applies if you haven’t hit the max yet. Medicare tax applies. That’s about 30% total in TX (no state tax).

We might need a wiki page on bonus withholding and taxation because this comes up a lot.
MrJedi
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Re: Profit Sharing vs. Cash Bonus

Post by MrJedi »

AW89 wrote: Fri Aug 28, 2020 12:06 am
AlohaJoe wrote: Thu Aug 27, 2020 11:59 pm
AW89 wrote: Thu Aug 27, 2020 11:29 pm Of course, cash bonus will be taxed at ~40% upfront....
Why on earth would your bonus be taxed 40%? The top marginal tax bracket is 37% and only kicks in once you are earning over $600,000 a year. You're making $120,000 a year. Your marginal tax bracket is 22%.
I very well could be wrong... But i found a few online calculators where you typed in your current salary/paycheck information & then entered your expected bonus & it gave me expected take home amount of the bonus and they were all around 60% of total.

I will edit my OP to remove that as I agree it is not something I am certain about considering I haven't received a routine cash bonus in my career so far.
Bonuses have taxes withheld differently than normal pay. However, they are still subject to the same ordinary income tax rates. If taxes are over withheld on your bonus, then you get the refund at tax return time.
Jack FFR1846
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Re: Profit Sharing vs. Cash Bonus

Post by Jack FFR1846 »

Your current profit sharing plan is obviously better for you. You are saving very little into your current 401k, so although you talk about this being for people who don't save towards retirement, sorry, but that's you. Your salary is more than double the national medium for a family of 4. You have plenty of cash money. With the money going into the 401k, it's much better tax wise.

The answer would be less clear if you said you were maxing your 401k and both Roths. But you're not.
Bogle: Smart Beta is stupid
zimmer0
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Re: Profit Sharing vs. Cash Bonus

Post by zimmer0 »

fellow O&G texan. With how cyclical the market has been i'd probably take the profit sharing for more consistency. Max out your 401k, still have an increase in take home pay, + additional tax deferred funding. Sure you'll miss out on a couple big years of bonus but the profit sharing will end up ahead over a ~10yr span IMO.
simas
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Re: Profit Sharing vs. Cash Bonus

Post by simas »

AW89 wrote: Thu Aug 27, 2020 11:29 pm 30 yrs old. Live in TX. Have wife who doesn't work & three young kids. I work for a large (mega-corp) company that is (my group at least) oil & gas related. While we have unfortunately had to lay off nearly 20% of our workforce I have recently been approached with a promotion to move to a new business unit (still O&G related).

While the majority of the company has been put on a 12 month salary freeze, furloughs, etc... I am going to receive a 11%+ increase in base salary bringing my base to $120K from $107K. While I feel I could potentially try & negotiate this more I do know that internal promotions are typically 10% & given the current economic environment (especially within the O&G industry) I am not sure it is worth pursuing.

Thoughts?
1. Pay/comp increase - typically in megacorps, each position has a pay band in it that could be further differentiated based on geographic areas grouped. Where is your new offer in terms of the pay bank for that rank/title you are considering accepting ? forget the current base, that is less relevant.

2. 401k contributions - use them to the max if your budget allows for that. In addition to savings you also get tax discount from the state , both directly on income tax and through other things like lowering your AGI impacting other credits
niceguy7376
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Re: Profit Sharing vs. Cash Bonus

Post by niceguy7376 »

AW89 wrote: Thu Aug 27, 2020 11:29 pm I have been given the choice of staying on my current payroll structure or moving to the new groups structure. Currently I receive a profit sharing bonus of 6-7%.... It is pretty much guaranteed to fall within this range but it does go directly into my 401K in which I can't touch until I am retirement age.
So does Employer profit sharing be considered as part of the difference between 19.5k and the max of 56K? In this scenario, if employee has the capability to do after tax and reaches the max limit, how will it be handled?
Texanbybirth
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Re: Profit Sharing vs. Cash Bonus

Post by Texanbybirth »

Same state and family structure as you (for now, #4 due soon). I make similar to you, receive an annual cash bonus and I never pay 40% taxes. Because of pre-tax contributions, HSA, etc. we are squarely in the 12% tax bracket.

You may have been thinking of your employer's required withholding on cash bonus payments. Currently that rate is 22%. However, that's not the same as taxes you owe to Uncle Sam and you might get some of that withholding back when you file your taxes. You can also adjust your withholding on your regular paychecks to potentially compensate for some of this extra withholding on the bonus.

As to your question of which structure to pick, that's a tough one. I like the idea of being forced to play a larger portion of your compensation into your 401k since as someone said you don't save a whole lot right now. However, that 2.0 multiplier would more than make up for a couple years of low 401k contributions! Can you talk with new team members to see what the rate has been over the last few years?
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
Topic Author
AW89
Posts: 15
Joined: Tue Mar 31, 2015 9:22 am

Re: Profit Sharing vs. Cash Bonus

Post by AW89 »

Thanks everyone for the responses, especially around how the bonus would likely be taxed. That is good to know.

I agree my 401K contributions need to be higher, and believe me, at one point were. Now that my EF is back to where I feel comfortable I plan to increase that.

While 10% isn't high, after accounting for my current profit sharing and company match ends up being 20% total. Of course, I have room to increase this & need to do so.

My salary hasn't always been this high, in fact just three years ago was in the $75-80K range. My wife & I also paid down nearly $70K in student loan debt when we first got married & saved up to buy a house. Of course, i may have been better off putting all of the extra cash into the market instead of into loans but I have no regrets becoming debt free early in our marriage before continuing to expand our family & purchase our home. So through my 20's I feel we have done okay for ourselves considering no help from family, raising three young kids on my salary alone for the most part, while also continuing to excel & advance in my career. My 401K balance isn't crazy by any means, but I don't think $225K is terrible either but again comparing to bogleheads it isn't much.

While I could pay the car off today of course, i have auto payments set to $1k/mo... Once that goes away in a few months I was planning to divert that money into ROTH to max out both wife & I's annual limits. If I up my 401K to 16% I'll be at or close to max 401K and divert car payment into ROTH. Then maybe take the cash bonus which can help with any end of year cash flow hits (annual prop taxes/insurance, etc).

I also didn't include in my OP that I do have an HSA with some money in it & a small taxable account.

So with all that being said, do most still seem to believe I'd be better off sticking with the profit sharing plan?
iraconfused
Posts: 56
Joined: Tue Apr 16, 2019 4:05 pm

Re: Profit Sharing vs. Cash Bonus

Post by iraconfused »

I work for a Big 3. I tell people at work to put profit share in 401k. It is money that you really do not need (the way I look at it) and most do not put ANYTHING in. If you put at least that in with what employer puts in you should be ok. If putting in 10%+ even better. Employer puts in between 9-10% of a 40 hr check per week. You can continue with the 10% since nice raise and do profit share. Start Roth for you and wife with what you would increase or after car paid off?
Topic Author
AW89
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Joined: Tue Mar 31, 2015 9:22 am

Re: Profit Sharing vs. Cash Bonus

Post by AW89 »

Had a hard time following your message but i think what you were saying is keep current at 10%, keep company profit sharing + 401k match (another 10%) & then use car payment to fund ROTHs and leave whatever paycheck increase I receive from the raise to give us a little more flexibility in monthly cash flow.

Seems like a good plan as well. I do think staying on profit sharing would be good because it forces extra money into retirement with no other option but I would hate to miss out on a good year where the multiplier could get to 1.5 or 2x.
iraconfused
Posts: 56
Joined: Tue Apr 16, 2019 4:05 pm

Re: Profit Sharing vs. Cash Bonus

Post by iraconfused »

In short that is what I said.

Seems like a good plan as well. I do think staying on profit sharing would be good because it forces extra money into retirement with no other option but I would hate to miss out on a good year where the multiplier could get to 1.5 or 2x.

Key words are "COULD GET" play it safe and put in profit share
Topic Author
AW89
Posts: 15
Joined: Tue Mar 31, 2015 9:22 am

Re: Profit Sharing vs. Cash Bonus

Post by AW89 »

Well, my decision has been made much easier. I found out yesterday that the new group I am moving into has received less than a 1x multiplier each of the last 3-4 years..... So profit sharing it is.

Last thing to do is simply be disciplined & take the action to increase my current contribution to the 15% range. If I do that, including company match/profit sharing would put me at about $30K/yr being invested into retirement before any ROTH/HSA or other investments.
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