Temporary pay increases and bonuses

Generally, there are two types of pay:

1. Regular pay 

   This is the payroll you're familiar with, where you pay regular compensation to your staff for their work on an hourly, weekly, or annual basis. Regular payroll is taxed for income as well as unemployment, social security, and other programs.

2. Supplemental pay

   This is pay that is above and beyond regular pay, like overtime, tips, bonuses or rewards, payments for accumulated or unused time off, severance pay, back pay, or retroactive pay increases. These wages are reported in a separate part of the W-2 that you provide your employees at the end of the year instead of under regular wages. Supplemental pay is taxed at a different rate, and most payroll taxes are not included.

You can include supplemental pay with a regular paycheck that you may issue weekly, bi-weekly, or monthly, depending on your payroll cycle, or you can issue it separately. For a bonus, it may be helpful to issue it as a separate paycheck, so it's clearly separate income. If you're offering a temporarily pay increase, include it in a weekly paycheck or as a separate retroactive paycheck.

Bonuses

Bonuses are additional funds you pay one time, usually for efforts that have gone above and beyond your normal expectations. Many programs give bonuses as a thank you for above and beyond efforts. Some child care businesses use bonuses to attract or retain staff in a competitive job market. For example, an existing employee receive a retention bonus if they remain at your child care program for an additional six months. In the case of a new hire, a bonus issued after the first 90 days of employment, which acts as an incentive to accept a position at your child care program.

A bonus should have a formal written communication to your employee, either by letter or email, which includes:

1. Why they're receiving the bonus
2. The time period it affects
3. The amount of the bonus
4. When they'll receive the funds

A simple communication to an employee, might be:

Dear _______,

Thank you so much for your efforts over the past six months. Your contributions helped ensure that children in our care stay safe and continue to learn.

In gratitude for these efforts, we're awarding you a bonus in the amount of [$XXXXX}, which will be paid in your next pay period on [MONTH, DAY, YEAR[.

Thank you again for your efforts.

Sincerely,

__________________

The communication can be simple and short, but it's important to record the terms.

If you're using a bonus as an incentive for staying at your business, put it in writing at the time you make the commitment. Include the time period, the amount, and how it'll be paid, but make sure that it's not guaranteed. If there's poor performance or disciplinary issues along the way, the employee will forfeit the bonus.

In this case an example letter you might give to an existing employee or new employee might be:

Dear ________,

Thank you for your commitment to work [or for continuing to work at] our child care center. In our efforts to keep the best staff members, we are offering you the potential to earn a bonus at the end of six months, provided you continue to have satisfactory or better performance and remain employed with our organization during this time. The bonus will be [$XXX] in your payroll as of the date six months from now on [MONTH DAY, YEAR].

We're excited for your continued work and contributions with our child care.

All the best,

_______________

Never imply that a bonus is guaranteed. It's based on performance and timing. This prevents you from having to pay the bonus to an employee who underperforms or is terminated.

Data from the Society of Human Resource Managers shows bonuses are usually between 5% and 20% of the annual salary. The US Small Business Administration related to the Paycheck Protection Program and their guidance states a “reasonable” bonus was 10% or less of annual salary. There's no guidance on the frequency of bonuses, so you can give one bonus a month for retention, or quarterly bonuses to new employees who stay with you.

Temporary pay increases

We're starting to see more child care providers use temporary pay increases to compensate employees for their efforts as in addition to providing increased rates in a labor market. Temporary pay increases can have a positive impact on ensuring staff morale and retaining staff members.

Ensure you're not making a commitment to a permanent pay increase. Make sure there's something in writing that tells the employee what the terms of this agreement are, specifically:

• The amount of the temporary pay increase
• Why they're receiving it
• How long it will last
• The increase is dependent upon continued satisfactory performance

A letter to an employee might be:

Dear _________,

We're temporarily increasing your salary by [X%], as we've discussed, in recognition of your extra efforts. This changes your pay from [$Y] per hour to [$Z] per hour. This is a temporary pay increase and will start on [MONTH DAY, YEAR] and end on [MONTH DAY, YEAR], with your continued satisfactory performance or better and employment with our organization.

We look forward to being able to compensate you at a higher level during this period to reflect your extra efforts.

Sincerely,

______________

Back and retroactive pay

Back pay is used to correct mistakes made in the past. For example, you issued a payroll a month ago and realized you forgot to include your staff members' overtime pay. 

Retroactive pay is paying somebody for past efforts, whether it's their salary or a bonus. For example, you have an employee who is paid $15 per hour, and you missed three hours of their time last month, that means the employee is owed $45 in back pay. If an employee makes $15 per hour and you want to give them a temporary pay increase of $2 an hour that goes back to the previous month, that means you owe an additional $2 per hour of retroactive pay for that entire month.

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.