How does profit-sharing work?

This is one of the best ways to line up employee success with company success. Profit-sharing is a great method to increase employee productivity and performance. It also encourages innovative thinking and makes the employees of a company feel more like a family knowing they all can benefit from a company's financial success.

Most profit-sharing plans see employees receiving a share of a company's profit on a quarterly or annual basis. Employees often use the money gained from profit-sharing plans to save for retirement. There are many different types and structures of profit-sharing plans. Here are some common profit-sharing plans and how they work:

• Deferred profit-sharing plan

  Deferred profit-sharing plans are ones in which employers give out funds at specific times. This might include instances like:

  • Employee retirement

  • Employee disability

  • Employee death (in which it goes to the employee's family)

  • When an employee leaves the company

  Employers can place the funds earned from profit-sharing into specific pension accounts for their employees. This income remains non-taxable until employees receive the funds in full when they retire, or in any of the other instances listed above. Certain companies offer these contributions in the form of stocks.

• Cash profit-sharing plan

  A cash profit-sharing plan typically works by employers choosing to distribute profit-sharing funds to employees at the end of a fiscal year and in the form of a cash bonus. This type of plan adds the profit-sharing funds right onto the employees' paychecks. A cash profit-sharing plan is tax deductible for employers. This type of plan works great as an employee incentive.

• Combination of a deferred profit-sharing plan and cash profit-sharing plan

  Employers also have the option to mix the two plans laid out above. This type of hybrid profit-sharing plan is one in which employers create profit-sharing retirement funds for employees and also reward them with cash bonuses several times a year or at the end of the year. This types of the plan make for a balanced approach to profit-sharing concerning workers.