As the name suggests a profit sharing plan is a plan wherein a company or business shares a part of the profit to its employees. Basically, it’s a supplement to the employee’s salary – you can think of it as something as a bonus that showcases the health of the company or business as a whole.

1. Profit Sharing 101
As the name suggests a profit sharing plan is a plan wherein a company or business
shares a part of the profit to its employees. Basically, it’s a supplement to the
employee’s salary – you can think of it as something as a bonus that showcases the
health of the company or business as a whole.
Depending on how well the company or business does the share each employee will
get will vary. This means that the share of each employee this year may not be the
same as last year or the same a year from now.
Depending on the company employees will typically get one of two types of profit
sharing – cash or deferred. In a cash plan the share is usually given out as a bonus in
the form of cash or maybe in stocks. The amount will depend on the contract and the
amount of the actual profit. While this is good for many employees since they can spend
it as soon as possible it also means that it gets taxed as soon as possible also.
To delay the onset of taxes some companies go the deferred plan route. In this plan the
bonus is put into individual retirement accounts for each employee. The money that is
put in IRAs or 401k plans is tax deferred so it is able to grow virtually tax free. Only
when the money is taken out of these accounts will taxes kick in.
At the same time these profit sharing plans come with a number of advantages and
benefits. For one thing they increase an employee’s loyalty to the company. Since they
are getting something more for their hard work other than their basic salary they will feel
more connected to the company especially if they know that the more the company
makes the bigger their bonus will be.
This in turn will increase their productivity. Again, this comes down to the more the
company makes the bigger their bonus. In their minds the more they work for the benefit
of the company the more they will get back since the company will profit more.
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