Publication date: February 12, 2025
Accounting, bookkeeping and economic perspectives — how can they be managed and classified?
How to balance them against accusations of discrimination?
The article practically discusses the differences between a bonus and an award for employees. The article first of all lists the differences between them, how to record bonuses, awards – in accounting books. Then we will focus on the moments when we can talk about the occurrence of discrimination in the awarding of bonuses, how to tax them and awards. The principles of accounting, bonuses and awards for employees and other important information about them will be considered at the end of the article.
Bonus and award – differences in the light of labor law
Bonus and award are two different forms of employee gratification, although they are sometimes used interchangeably. The main differences between them concern the legal basis, the principles of awarding, and the nature of the claim.
What is a bonus and what is an employee award?
A bonus is a benefit that an employee is entitled to after meeting certain conditions set out in the remuneration regulations or employment contract. It is an element of remuneration and has a claim nature, which means that if the employee meets all the required criteria, the employer must pay it.
The award, however, is discretionary, meaning that it depends solely on the employer’s decision. It is not dependent on specific conditions or criteria and may be awarded for special achievements, initiative or exemplary performance of duties.
Definitions of bonuses and awards in labor law
Polish labor law does not specify the exact definition of a bonus, but it clearly allows its existence as an element of remuneration if its principles are included in the company’s internal legal acts. A bonus is a claim, because its granting results from clear, established conditions.
The award is defined in Article 105 of the Labor Code, which indicates that the employer may grant it for special merits in work. The award is discretionary, which means that it is not mandatory even in the case of extraordinary employee results.
Differences between a bonus and an award
The main difference is that a bonus is a claim benefit – its payment is dependent on meeting certain criteria. An award, on the contrary, is discretionary and the employer awards it at their own discretion. A bonus serves as a systematic remuneration, while an award is awarded sporadically as a form of recognition of exceptional achievements.
Bonus conditions
A bonus, especially a statutory bonus, must be awarded based on strictly defined criteria included in the remuneration regulations, collective labour agreement or employment contract. Most often, it concerns work results, efficiency or meeting specific goals. An employee who meets these conditions has the right to demand payment of a bonus, which makes it a component of remuneration.
Award – rules of granting
The award may be granted for above-average work results, innovation or commitment beyond standard duties. Its granting depends on the employer’s discretion and is not systematic. There is no obligation to specify the conditions for its granting, which makes the award more motivating, emphasizing the appreciation of the employee’s exceptional merits.
Statutory and discretionary bonus
A statutory bonus is a claim benefit, the principles of which are clearly defined in the remuneration regulations. An employee who meets the conditions can demand its payment. In turn, a discretionary bonus depends solely on the will of the employer and there are no specific conditions that the employee must meet. It is more voluntary in nature, similar to a reward.
Taxation and Social Insurance contributions
Both the bonus and the award are subject to taxation and Social Insurance contributions, as is the basic salary. The bonus, regardless of its form, is the employee’s income, which means that the employer is obliged to correctly account for these benefits in order to avoid tax penalties.
A bonus and an award differ in terms of the method and principles of awarding. A bonus is a benefit resulting from clearly defined conditions, while an award depends on the employer’s discretion and is more occasional in nature. A bonus supports regular remuneration, while an award motivates employees, recognizing their above-average commitment.
Employee compensation systems often include elements such as bonuses, and discretionary bonuses. These terms have different meanings, which affects the possibility of pursuing them in court and the terms of their payment.
Award / reward is a benefit that is entirely dependent on the employer’s free decision. The employee has no claim to its payment, unless the reward has already been awarded and has not been paid. A reward is not formally a component of remuneration for work, except when it is paid regularly in fixed amounts, then it loses its exceptional character.
A bonus is a benefit that is dependent on the employee meeting specific, verifiable conditions, such as meeting the company’s financial goals. These conditions must be objectively verifiable, and if they are met, the employee can claim the bonus in court. A bonus is a component of remuneration for work and is included in the calculation of holiday pay, holiday equivalent or severance pay.
Discretionary Bonus A discretionary bonus, despite its name, is similar to an award, as its payment depends solely on the employer’s discretion. The term “discretionary bonus” is often misleading, suggesting that it is a bonus, the terms of which are formally established, when in fact it may have the characteristics of an award. It may be paid regularly, which makes it difficult to classify it unequivocally.
The importance of classification The distinction between a bonus and an award has significant legal consequences. A bonus, as a component of remuneration, is subject to legal protection, which means that the employer cannot freely change its terms without making formal changes to the contract. In turn, an award does not provide such rights. In the case of a so-called discretionary bonus, the employee can try to pursue their claims in court, demonstrating that they met the bonus conditions, even though they were not formally established.
In practice, benefits called bonuses can combine features of both bonuses and awards. In such cases, a detailed analysis of the documentation and the employer’s previous practices towards other employees is crucial to determine whether the employee has the right to claim such a benefit in court.
In the employee remuneration system, awards and bonuses play important roles, but they differ in terms of their nature and the conditions of granting. The Labor Code in Article 105 mainly concerns awards that can be granted for exemplary performance of duties. Bonuses, on the other hand, are more formalized and result from internal company regulations, employment contracts or other agreements.
The award , often called a “discretionary bonus”, is not a fixed element of remuneration and depends entirely on the employer’s decision. The employee becomes entitled to the award only after it is officially awarded by the employer, and not by meeting specific requirements. Awards are usually awarded for exceptional achievements in work and may be in the form of money or material. Information about the award is included in the employee’s personal file, but the criteria for its award are not very formal. Due to its discretion, the award is not enforceable in court, except when the employer has undertaken to pay it and has not fulfilled this obligation. The employer must also pay attention to the issues of equal treatment of employees, so as not to be accused of discrimination.
A bonus is a benefit that an employee acquires when clearly defined and verifiable conditions are met, such as work results or other performance indicators. A bonus is a claim, which means that the employee can demand it if they have met the criteria specified in the regulations. A bonus is also more formalized and covered by the company’s internal regulations, which must clearly define the conditions for granting it. Unlike a reward, a bonus does not depend on the employer’s subjective assessment, but on the employee’s objective results, which minimizes the risk of unequal treatment.
Taxes and Social Insurance Contributions Both bonuses and awards are subject to personal income tax (PIT) and are covered by Social Insurance contributions, as is regular remuneration. The tax rates are 12% for income up to PLN 120,000 per year and 32% for income above that amount. Contributions include pension, health and sickness contributions, which means that bonuses and awards are part of the employee’s income and affect their social security.
Summary A reward is discretionary and its granting depends on the employer’s decision, while a bonus is based on measurable criteria and has a demanding nature. It is crucial for an employer to clearly define the conditions for granting a bonus in internal regulations in order to avoid potential legal problems and the risk of allegations of unequal treatment of employees.
Bonus vs. Reward There is no legal definition of a bonus in Polish labor law, so it is crucial to determine the source from which a given benefit results. Bonuses usually result from the remuneration regulations, work regulations, the collective labor agreement or other internal documents. A bonus is objective in nature – its granting depends on meeting specific, measurable criteria set by the employer. Unlike a bonus, an award is a discretionary benefit, granted on the basis of the employer’s subjective assessment.
Bonus – conditions to be met A bonus is not discretionary – its granting results from the fulfilment of specific conditions. The employee automatically acquires the right to it when he meets certain criteria. The employer does not have freedom of decision in granting a bonus, and his role is reduced to establishing and assessing these criteria. Bonuses are often used as a form of motivation, aimed at increasing the efficiency and quality of work.
Award – discretionary benefit An award, sometimes incorrectly called a “discretionary bonus”, is entirely dependent on the employer’s decision and does not result from previously established conditions. The employer’s declaration of granting an award is the only basis for its payment. Although the right to an award may be recorded in an employment contract, collective agreement or remuneration regulations, there are no specific criteria that the employee must meet. An award is a subjective distinction for special achievements or exemplary performance of duties.
Discretionary Bonus – The contradictory concept of a “discretionary bonus” is internally contradictory. If the conditions for granting a benefit are clearly defined and verifiable, then the benefit cannot be discretionary. A bonus results from specific regulations and conditions, so it cannot depend on the employer’s subjective decision. If the benefit is not linked to any measurable criteria, it is not a bonus, but a reward.
Component of remuneration and bonus Cash benefits regularly paid for performing official duties, which are called “discretionary bonuses”, may be treated as a component of remuneration for work. This means that the employee has the right to receive them, even if they are paid systematically without specific bonus criteria. The name of the benefit is not decisive – its nature is determined by the conditions of granting, not the name itself in the employee documents.
Summary A bonus and an award are two different types of benefits, differing in the terms of their granting. A bonus is based on objective criteria and is an employee’s right, while an award is the result of a subjective decision by the employer and is not a permanent element of remuneration.
Posting employee bonuses for example for 2023
Accounting for employee bonuses for 2023
In the accounting context, employee bonuses that will be paid in 2024 for results achieved in 2023 should be included in the balance sheet costs of 2023. In accordance with the accrual principle (Article 6, Section 1 of the Accounting Act), expenses must be assigned to the period to which they relate, regardless of the actual date of bonus payment.
Bonuses awarded in 2023
If bonuses were awarded in 2023 and their amount is known, they should be recorded in the accounting records as salary costs. In entities that record costs in accounts of groups 4 and 5, the postings may look as follows:
Gross bonus amount:
Wn account 40-4 “Salaries”,
Account 23-0 “Salary Settlements”,
Social Insurance Institution contributions charged to employees:
Wn account 23-0,
Account 22 “Public law settlements”,
Income tax advances:
Wn account 23-0,
Account 22 “Public law settlements”,
Social Insurance Institution contributions charged to the employer:
Wn account 40-5 “Social insurance and other benefits”,
Account 22 “Public law settlements”.
Bonuses not awarded in 2023
If the bonuses were not formally awarded in 2023 and their amount was not known on the balance sheet date, it is necessary to create provisions through accrued expenses. In accordance with Article 39, Section 2 of the Accounting Act, entities create accrued expenses for probable liabilities, including future employee benefits, relating to the current reporting period. The entries may look as follows:
Wn appropriate team account 5,
It has account 64-1 “Accruals and prepaid expenses”.
Once the bonus is awarded in 2024, the actual costs incurred should be recognised as in the above points and the provision should be released:
Wn account 64-1.
Units exempt from the obligation to create reserves
According to Article 39, Section 6 of the Accounting Act, some entities, including limited liability companies, may be exempt from the obligation to create accrued expenses. Nevertheless, in practice, even entities not covered by this provision may not create reserves if the amount of the bonus is immaterial to the fair view of the financial statements.
Bonuses paid from profits
Employee bonuses can also be paid from net profit. In this case, the accounting entries might look like this:
Gross amount of profit bonus:
Wn account 82 “Settlement of financial result”,
Account 23-0 “Salary Settlements”,
Social Insurance Institution contributions charged to employees:
Wn account 23-0,
Account 22 “Public law settlements”,
Income tax advances:
Wn account 23-0,
Account 22 “Public law settlements”,
Social Insurance Institution contributions charged to the employer:
a) If the contributions are financed from profit:
Wn account 82,
Account 22 “Public law settlements”,
b) If they are not financed from profit:
Wn account 40-5,
Account 22 “Public law settlements”.
Bonuses from profit for 2023 are booked in the year of adoption of the resolution on profit distribution, i.e. usually in 2024. No reserves are created for such bonuses.
Awards and bonuses in accounting records
Employee rewards and bonuses are a discretionary element of remuneration, the amount of which depends on the financial results of the company and the efficiency of employees. The employer can grant employees bonuses and awards in cash or in kind, which constitute additional motivation and are intended to increase work efficiency. A distinction is made between discretionary and statutory bonuses.
A discretionary bonus depends on the employer’s assessment and is not guaranteed. The employee has no claim to its payment unless the bonus was awarded but not paid. In turn, a statutory bonus is specified in the contract or remuneration regulations and is of a claim nature, which means that the employee has the right to demand its payment after meeting certain conditions. A special type of statutory bonus is a jubilee award, dependent on length of service.
Awards and bonuses are taxable and affect the financial results of the company. They can be financed from the company’s current assets or from the net result, but those paid from the net result do not constitute costs of obtaining income for the company. From the accounting perspective, payments from current assets can be included in the costs of obtaining income if certain conditions are met, such as the finality of the expense and its connection with the conducted business activity.
Bonuses and awards, both cash and in kind, are the basis for calculating contributions to social insurance and the Labor Fund. Exceptions include jubilee awards, invention awards, and bonuses paid for the period of incapacity for work. The value of benefits in kind is determined based on market prices or average prices applied to other recipients.
Payments of bonuses and awards also affect the amount of holiday pay and the equivalent for unused holiday. These rules differ depending on the type of bonus – statutory bonuses are included in holiday pay, while discretionary bonuses are not. Fixed statutory bonuses are included in the salary for a month of holiday, and variable bonuses – based on the average of the three months preceding the holiday.
When can discrimination occur in awarding discretionary bonuses?
A discretionary bonus, also known as an award, is a benefit that depends on the employer’s decision to grant. Unlike a statutory bonus, a discretionary bonus is not a claim, which means that the employee cannot claim it if it has not been granted to them. However, once it has been granted, the employer is obliged to pay it.
Differences between statutory and discretionary bonuses:
The statutory bonus is awarded on the basis of the provisions of the remuneration regulations or employment contract, with specific criteria.
A discretionary bonus (award) depends solely on the employer’s assessment, but must also be awarded in accordance with the regulations, e.g. the principle of equality of employees.
Limitations on granting discretionary bonuses: Despite the employer’s freedom of decision, the Labor Code imposes certain limitations, especially regarding equal treatment. The employer must apply fair criteria for employee evaluation and observe the principle of equality, which applies to both men and women.
Labor Code and discrimination: Employees have the right to equal pay for equal work or work of equal value, regardless of gender, age, disability, nationality or other characteristics. Therefore, if an employer ignores some employees when awarding a discretionary bonus without an objective justification, this may be considered discrimination.
Supreme Court position: The Supreme Court’s case law emphasizes that discretion in awarding a discretionary bonus is not entirely arbitrary. The employer must comply with objective evaluation criteria and the principles of equal treatment and prohibition of discrimination. In the event of failure to award a bonus without a substantive justification, the employee may pursue their rights by raising an allegation of a breach of the principles of equality in employment.
Claim for a discretionary bonus: Although a discretionary bonus is not a claim in principle, in a situation where an employer ignores some employees, employees can claim. This also applies to a situation where the employer has granted an award and then refused to pay it. In such a case, the employee has the right to claim it based on the employer’s declaration of intent.
Summary: A discretionary bonus, despite its free nature, is subject to legal restrictions, in particular in the context of equal treatment of employees and the prohibition of discrimination. An employer cannot grant awards in a discriminatory manner, and in the event of a breach of these principles, an employee may pursue their rights in court.
How to tax employee bonuses and cash awards?
Employers often give bonuses and awards as a way to appreciate and motivate employees. However, the key question concerns their taxation and contributions.
Types of Bonuses
Bonuses can be divided into two categories:
Statutory bonus – is part of the salary and can be claimed by the employee. The conditions for granting it should be clearly defined in the remuneration regulations.
Examples of statutory bonuses include: bonuses for length of service, bonuses for a specific function, or bonuses for working in harmful conditions.
Discretionary bonus – awarded at the employer’s discretion, does not require a provision in the regulations. Its amount and awarding depend on the individual assessment of the superior.
Bonus taxation All cash payments, including bonuses, are treated as income from employment. According to Article 12 of the Personal Income Tax Act, income includes, among others, remuneration, awards and benefits in kind. Income from statutory and discretionary bonuses must be taxed, which means the obligation to pay an advance income tax of 17% (after July 1, 2022 – 12%) or 32% after exceeding the tax threshold. Income from bonuses is also included in the basis for calculating ZUS contributions, in accordance with the regulation of the Minister of Labor and Social Policy of December 18, 1998.
Exceptions to the rule There are situations where bonuses may be settled differently:
An employee on benefits paid by the National Insurance Company.
Awards financed from the Company Social Benefit Fund, which usually applies to larger companies.
Additional remuneration may be included in the costs of obtaining income in the period in which it is due, provided that it was paid or made available to the employee in accordance with the provisions of the Labor Code or the contract resulting from the employment relationship.
Summary Bonuses and cash awards are taxed and subject to contributions like other components of remuneration. Employers must be aware of the regulations governing these matters in order to properly manage tax and contribution obligations related to employee benefits.
Discretionary bonus as a tax expense – accounting rules
A discretionary bonus is a specific type of allowance paid to employees, the granting of which depends on the decision of a decision-making body, such as the company’s board. It is important to determine whether a discretionary bonus can be treated as a cost of earning income and at what point it should be included in tax settlements.
Discretionary bonus as a tax deductible cost Pursuant to Article 15 Section 1 of the CIT Act, in order for an expense to be recognized as a tax deductible cost, it must meet several conditions:
Incurred by the taxpayer – the cost must be covered from the taxpayer’s assets.
Definitive – the value of the expense cannot be refunded to the taxpayer.
Connection with business activity – there must be a cause and effect connection with the business activity conducted.
The purpose of obtaining income – the expense should be incurred in order to obtain, secure or maintain a source of income.
Proper documentation – the expense must be documented.
No exclusions – the expense cannot be included in the group of expenses excluded from tax deductible costs (Article 16, paragraph 1 of the CIT Act).
Discretionary bonuses meet the above criteria because they are related to business activity and are not excluded from tax deductible costs.
The moment of recognition of a bonus as a tax cost A problematic issue is determining the moment at which a discretionary bonus becomes a tax cost. According to art. 15 sec. 4g of the CIT Act, remuneration from an employment relationship is a cost of obtaining income in the month for which it is due, provided that it was paid or made available within the deadlines resulting from the provisions of labor law.
If the remuneration has not been paid on time, the provisions of Article 16 section 1 item 57 of the CIT Act shall apply, which stipulates that unpaid remuneration cannot be recognised as tax deductible costs.
Definition of “due” The term “due” means that an amount becomes due when it results from legal regulations, a contract or another legal relationship. Discretionary bonuses become “due” only after they have been approved by the company’s body. Employees can only demand payment of a bonus after it has been awarded and the amount has been determined.
Example In August, the members of the company’s management board passed a resolution to grant a discretionary bonus with a payment deadline of September 10, but the payment took place on September 11. In this case, in accordance with Article 16 section 1 item 57, the cost should be recognized in the month of payment (September), and not in the month for which the bonus was due.
If the payment had been made by September 10, the company could have included the cost in August.
Summary Discretionary bonuses are costs of obtaining income, but the moment of their recognition as a tax cost is crucial. This cost arises in the month for which they are due, provided they have been paid on time. Otherwise, the cost is recognized on the date of payment. It is important to precisely determine the date of award and payment of the bonus, which is important from the perspective of tax settlements.
Bonuses or rewards for employees at the end of the year?
The importance of the end of the year for businesses
The end of the year in many companies is a time for summing up both financially and employees. This is the moment when employers evaluate the implementation of annual goals and plan new budgets, including bonuses and awards for employees. Setting goals and evaluating employees becomes crucial in the context of maintaining a balance between employee expectations and the interests of the company.
Setting annual goals
Companies often set annual targets for employee groups to avoid accusations of discrimination. However, there is a practice where new hires may have targets that are easier to achieve. It is important that the targets are realistic and achievable within the standard working hours, which is consistent with the principle that an employment contract is a contract of best efforts. An employee should not be penalized for failing to meet unrealistic targets.
Salaries and pay rises
The amount of pay rises in companies is rarely the same for all employees. Employers are most often guided by the criteria of work quality, seniority and skills. It is important that the criteria used are objective to avoid accusations of discrimination. The increase in the cost of living resulting from inflation means that employers must take into account its impact on decisions on pay rises, especially in attractive sectors.
Settlement of annual goals
It is recommended to hold joint discussions on the implementation of annual goals. This approach allows for the discussion of achievements and areas for improvement. Regardless of the feedback method, it is important for employees to feel respected and appreciated. In the case of achieving high results, it is worth considering granting a bonus or award.
Bonus and reward
Bonuses and awards differ not only in name, but also in legal regulations. Awards are regulated in the Labor Code and awarded for exemplary performance of duties, they are discretionary, which means that the employee has no right to award them. In turn, bonuses can be statutory or discretionary, and their award may be associated with the employee’s claim. The classification of these benefits is based on the conditions for their award, not just their name.
Objective employee evaluation
In both planning and evaluation of work, it is crucial to use objective criteria. Financial decisions should be based on transparent principles. In a labor market where employees have more power, not only financial issues but also work ethics become important. Employers should clearly communicate the evaluation and remuneration criteria, which influences employees’ decisions regarding employment and further work in the company.
Summary
The end of the year is an important time for companies, when decisions are made about goals, salaries and employee evaluations. It is important that these processes are transparent, objective and based on clearly defined criteria. This not only allows for employee motivation, but also protects the interests of employers in the context of competitiveness on the labor market.
Many employers, in addition to the basic salary, also pay bonuses, awards and discretionary bonuses, which may be interpreted differently in the legal context.
Bonus vs. Reward
The bonus is an optional component of remuneration that the employee acquires based on objective criteria specified in the wage regulations. Fulfilling these conditions gives the employee the right to its payment, regardless of the employer’s decision.
The award is discretionary in nature, there are no set criteria for its award, which means that the decision on its payment lies solely with the employer.
The Supreme Court has assessed many times whether a given benefit is discretionary or a claim. For example, in the judgment of 21 January 2015 it was held that a discretionary bonus, if it is not a claim, is not part of the remuneration for work.
Bonus Qualification
In its ruling of 5 December 2016, the Supreme Court stated that bonuses cannot be paid systematically or to all employees. A discretionary bonus, paid regularly for standard performance of duties, becomes an element of remuneration. Therefore, the employee can claim its payment as a component of holiday pay.
Bonus Promises
In the case of a promise of a bonus by an employer, the Supreme Court in its judgment of 17 November 2016 held that this does not always lead to an obligation to pay it. The promise must be officially confirmed by a body authorized to represent the employer, and the lack of such confirmation invalidates the claim for payment.
Internal Regulations
Bonuses are subject to demand provided that the criteria specified in the employment contract or remuneration regulations are met. The Supreme Court in its judgments (e.g. of 18 February 2016) emphasised that failure to pay a bonus due to the employer’s financial reasons requires formal changes to the contracts or regulations. The employer cannot arbitrarily withhold bonus payments if appropriate legal actions have not been taken.
Discrimination in Pay
Refusal to pay a statutory bonus to an employee who has met the criteria for a bonus may violate the principles of equal pay. Case law examples show that if employees in the same positions who have not met the requirements receive bonuses, discrimination occurs.
Examples from Practice
An employee who completed his tasks on time did not receive a bonus due to customer complaints, while other employees who missed deadlines received a bonus. This action by the employer violates the principles of equal treatment.
An employer who informs about non-payment of bonuses without formal changes to the regulations violates the employees’ rights to agreed benefits.
Summary
When it comes to paying bonuses and awards, their qualification and meeting formal requirements are key, as well as compliance with the principles of equal pay. Employers should clearly define the criteria for granting bonuses to avoid employee claims and potential legal disputes.