What does profit sharing mean

There are both benefits and drawbacks to utilizing a profit sharing program, but when trained human resources professionals are able to plan and execute it effectively, profit sharing can be an ideal way to both improve employee morale and boost the bottom line.

Profit sharing can work in a variety of ways. The company contributes part of its pre-tax profits into a pool that is distributed among eligible employees. Amounts distributed can be dependent on salary, and profit sharing can be used as a supplement to existing benefit plans as well. Profit sharing generally occurs after the company determines final profitability for the year. Once a pool is created, either company leadership or the human resources team will create a formula for distribution.

According to the Department of Labor, the following are the steps required to set up a profit sharing plan :. Organizations should keep detailed records about how the plan is distributed among employees. If updates to the plan are needed, stakeholders should be included to alter documents and communicate changes to employees accordingly. Profits can be distributed to eligible employees in the form of cash or in stocks and bonds.

Those options reflect the two types of profit sharing plans: cash and deferred. Internal Revenue Service. Small Business. Retirement Savings Accounts. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Retirement Planning Retirement Savings Accounts. What Is a Profit-Sharing Plan? It is up to the company to decide how much of its profits it wishes to share.

Contributions to a profit-sharing plan are made by the company only; employees cannot make them, too. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. Expert Assisted Services. Tax Saving. Mutual Fund Investments.

GST Software. TaxCloud Direct Tax Software. Need Help? About us. Download link sent. Breaking Down A profit-sharing plan is a regular pension or retirement plan which will receive contributions from the employer. Calculation The most popular method for an organisation to calculate the profit-sharing allocation is by making use of the comp-to-comp strategy.