Bonus Agreement Template (US)
Updated on August 13, 2026
A bonus agreement records what an employee has to do to earn a bonus, how it is calculated, when it is paid and what can take it away. Two decisions inside it have consequences far beyond the document: whether the bonus is discretionary or promised, which determines whether it has to be included in the employee's regular rate for overtime; and when it is paid, which determines whether it stays outside the federal deferred-compensation rules.
The widely copied free version calls the bonus discretionary and then, in the next clause, reserves the employer's right to change the criteria or the calculation method whenever it likes. It forfeits the bonus if the employee is not 'actively employed in good standing' when it is paid, with no carve-out for death, illness, retirement or redundancy. It has a clawback with no time limit, no cap and no mechanics, and a confidentiality clause requiring the employee to keep their own pay secret. This template deals with each of those and adds the payment deadline the source never mentions.
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Bonus Agreement
- Date:
- Employer:
- ,
- Employee:
- ,
- Bonus:
- for
1. Purpose
This Agreement sets out the terms on which the Employer may award the Employee a bonus in respect of . It does not replace the Employee's contract of employment, which continues unchanged except as stated here.
2. Nature of the bonus
This bonus is an earned entitlement, not a discretionary award: if the conditions set out in this Agreement are met, the bonus becomes payable in accordance with it. The Employer may not withdraw or reduce it except as this Agreement provides.
3. Targets and calculation
The targets or criteria for this period are: . The bonus is calculated as follows: The target amount is , subject to a maximum of . No bonus is payable if performance falls below the following threshold:
Targets for any future period will be set and communicated in writing by , before the period begins. Targets already set for a current period will not be changed during it, unless the parties agree in writing or an event outside either party's control makes a target no longer meaningful, in which case the Employer shall set an adjusted target in writing and explain the adjustment.
4. Payment
Any bonus payable will be paid on through payroll, less required withholding and payroll taxes. The parties intend that any bonus under this Agreement is paid no later than the fifteenth day of the third month following the end of the year in which the Employee's right to it ceased to be subject to a substantial risk of forfeiture, so that it qualifies as a short-term deferral for federal tax purposes.
When the bonus is determined, the Employer shall give the Employee a written statement showing how it was calculated, including the performance figures used. If the Employee disputes the calculation, they may raise it with within 30 days of receiving the statement, and the Employer shall respond in writing.
5. Overtime and the regular rate
6. Eligibility
To receive a bonus the Employee must have met the targets or criteria above, have complied with the Employer's policies and their contractual obligations, and be employed by the Employer and not under notice of termination for cause on the payment date, subject to the leaver provisions below.
Time spent on any legally protected leave counts towards service and eligibility on the same basis as time worked, and targets will be adjusted where necessary so that the Employee is not disadvantaged by taking such leave.
7. Leavers
If the Employee dies or their employment ends because of permanent disability during or after the performance period but before payment, a pro-rata bonus is payable, calculated on , to the Employee or their estate on the normal payment date.
If the Employee's employment ends by reason of redundancy, or termination by the Employer other than for cause, a pro-rata bonus is payable on the normal payment date, calculated on .
In any other case where employment ends before the payment date, no bonus is payable for that period unless the Employer decides otherwise in writing or applicable law requires payment of an earned bonus.
8. Part-year and part-time service
If the Employee joins, changes role or changes hours during the performance period, the bonus is pro-rated on . Part-time employees are treated on the same proportionate basis as full-time employees.
9. Clawback
The Employer may require repayment of a bonus within months of payment where the Employee engaged in misconduct that would have justified summary dismissal, where the financial results on which the bonus was calculated are subsequently restated, or where the bonus was awarded on the basis of materially inaccurate or incomplete information. Repayment is calculated on the amount received net of tax and withholding, to the extent the Employee cannot recover that tax. The Employer shall invoice the amount in writing with an explanation, and shall not deduct it from wages unless the deduction is permitted by applicable state law and separately authorised in writing by the Employee.
10. Confidential information and pay discussions
The Employee shall keep confidential the Employer's non-public financial information, customer information and the underlying data used to calculate the bonus. Nothing in this Agreement prevents the Employee from discussing their own pay, benefits or terms and conditions of employment with anyone, from reporting a possible violation of law to a government or regulatory authority, or from responding to a lawful legal process.
11. Employment status and benefits
This Agreement does not create a fixed term of employment and does not otherwise change the Employee's employment status or notice terms. Whether the bonus counts as compensation for retirement-plan contribution purposes is determined as follows:
12. General
This Agreement is governed by the laws of . It may be amended only in writing signed by both parties. If any provision is held unenforceable, the rest continues in force. This Agreement may be signed in counterparts, including electronically. The Employee confirms they have read it, have had the opportunity to ask questions about it, and have received a copy.
For the Employer
Date:
Employee
Date:
Decide whether the bonus is discretionary — and then be consistent
A bonus is discretionary in the federal wage-and-hour sense only if it is not paid under any prior contract, agreement or promise, and both the fact and the amount of payment are decided in the employer's sole discretion. Once you tell staff there is a formula, a target or a payment date, the bonus is generally no longer discretionary — whatever the document calls it.
That is not a semantic problem. Non-discretionary bonuses must be included in the regular rate on which overtime is calculated for non-exempt employees, which usually means apportioning the bonus back over the workweeks it covers and paying the additional overtime due. This template makes the choice explicit at the top, uses matching language throughout, and flags the overtime recalculation where the bonus is earned rather than discretionary.
Fix the payment date, and keep it inside the short-term deferral window
The source document says only that the bonus is paid 'through the Company's standard payroll process'. That leaves out the single most important date in the document. A bonus paid on or before the fifteenth day of the third month after the end of the year in which the employee's right to it stopped being subject to a substantial risk of forfeiture generally qualifies as a short-term deferral and falls outside the federal deferred-compensation regime; paid later, it can be caught, with penalties that fall on the employee.
This template sets a payment date, states the short-term deferral intention expressly, and prompts you to take advice if payment will fall outside that window — for example, on a multi-year retention bonus.
Write good-leaver carve-outs into the eligibility clause
'Actively employed and in good standing at the time the bonus is determined and paid' is the clause that generates the most disputes, because it forfeits an award for work already done in circumstances the employee did not choose. This template keeps the active-employment condition as the default but adds configurable carve-outs for death, permanent disability, retirement at or after a stated age, redundancy or termination without cause, and the end of a fixed term — with a pro-rata payment in each case.
It also deals with protected leave: bonus targets and service conditions should not be applied so as to penalise an employee for time on a legally protected leave, and time on such leave counts towards the qualifying period on the same basis as time worked.
Give the clawback boundaries
A clawback with no time limit, no cap and no mechanics is both unattractive to employees and hard to enforce. This template limits recovery to a stated period after payment, sets out the triggers precisely — misconduct, a restatement of the figures the bonus was calculated on, or a bonus awarded on materially inaccurate information — and states that repayment is calculated on the amount net of tax withheld where the employee cannot recover the tax.
It also handles recovery mechanics honestly. Deducting from wages is regulated by state law, and many states require written authorisation from the employee or restrict deductions entirely. This template asks for repayment on invoice, with deduction only where lawful and separately authorised.
Take the pay-secrecy clause out
The source requires the employee to keep the terms of the agreement and any related bonus information confidential. Federal labor law protects employees who discuss their pay and working conditions with each other, and a number of states have their own pay-transparency statutes prohibiting employers from banning wage discussions. A broad confidentiality clause over the employee's own compensation is a risk that buys the employer very little.
This template replaces it with a clause protecting the employer's confidential business information — the financial data, customer information and calculation inputs behind the bonus — while expressly preserving the employee's right to discuss their own pay and terms.
Fill the gaps the source leaves open
Several practical questions decide what the bonus is actually worth, and the free version answers none of them: whether the bonus is pro-rated for part-year service or part-time hours, whether it is pensionable or counts towards a retirement-plan contribution, how it is taxed and withheld, what happens if targets are affected by events outside the employee's control, whether the employer may set targets unilaterally each year or must agree them, and how a dispute about the calculation is resolved.
This template answers each of them on the face of the document, and requires the employer to give the employee the calculation used — not just the number — which is what turns a bonus scheme into something an employee can trust.
Clause-by-clause guide
- Nature of the bonus
- States plainly whether the bonus is discretionary or an earned entitlement on stated conditions, and uses that language consistently.
- Performance period and targets
- The period the bonus relates to, the targets or criteria, and how and when targets are set for each period.
- Calculation
- The formula, the maximum, and any threshold below which nothing is payable, with a worked basis the employee can check.
- Eligibility and good-leaver terms
- The active-employment condition plus the carve-outs for death, disability, retirement, redundancy and end of a fixed term, with pro-rating.
- Protected leave
- Confirms that time on legally protected leave counts towards qualifying service and that targets are adjusted rather than applied blindly.
- Payment date
- A fixed payment date, expressed to fall inside the short-term deferral window so the award stays outside the deferred-compensation rules.
- Overtime and the regular rate
- Records that a non-discretionary bonus paid to a non-exempt employee is included in the regular rate and apportioned back over the period it covers.
- Tax and deductions
- States that the bonus is subject to withholding and payroll taxes, and how supplemental wages are withheld.
- Pro-rating
- How the bonus is adjusted for part-year service, part-time hours or a change of role during the period.
- Clawback
- Defined triggers, a recovery window, net-of-tax calculation, and repayment on invoice rather than by unauthorised wage deduction.
- Confidential information and pay discussions
- Protects the employer's business data while preserving the employee's right to discuss their own pay and terms.
- No change to employment status
- Confirms the bonus does not create a fixed term of employment or alter the employment relationship.
- Calculation statement and disputes
- The employer gives the calculation, not just the figure, and a short process applies if the employee disputes it.
US compliance checklist
Bonus terms interact with federal wage-and-hour law, the deferred-compensation rules, state wage-payment statutes and labor law.
Work out whether the bonus is discretionary for overtime purposes
A bonus is excludable from the regular rate only if it is not paid under a prior contract, agreement or promise and both the fact and the amount are in the employer's sole discretion. Anything announced in advance with a formula or target is generally non-discretionary.
29 CFR 778.211Recalculate overtime for non-discretionary bonuses
A non-discretionary bonus paid to a non-exempt employee must be included in the regular rate and apportioned back over the workweeks it covers, with the additional overtime due paid at that point.
29 CFR 778.208Pay inside the short-term deferral window
A bonus paid by the fifteenth day of the third month following the end of the year in which it ceased to be subject to a substantial risk of forfeiture generally qualifies as a short-term deferral outside the deferred-compensation regime. Take advice before designing anything that pays later.
26 CFR 1.409A-1Check state rules before deducting a clawback from wages
State wage-payment statutes regulate deductions from pay, often requiring specific written authorisation and sometimes prohibiting deductions for this purpose. Ask for repayment on invoice and deduct only where the state permits it and the employee has authorised it.
Do not prohibit employees from discussing their pay
Federal labor law protects concerted discussion of pay and working conditions, and several states have pay-transparency statutes prohibiting employer bans on wage discussions. Keep confidentiality clauses to business information.
Check whether the bonus is earned wages under state law
Some states treat an earned bonus as wages that must be paid on termination regardless of an active-employment condition. Confirm the position in the states where your employees work before relying on a forfeiture clause.
Confirm the effect on benefit plans
Whether the bonus counts as compensation for retirement-plan contributions depends on the plan document's definition of compensation. Check it rather than assuming, because a mismatch creates a plan-operation failure.
Apply supplemental-wage withholding correctly
Bonuses are supplemental wages for federal withholding purposes and are subject to payroll taxes. Confirm the withholding method with your payroll provider so the net figure the employee expects is the one they receive.
How to complete the bonus agreement
- Choose the type of bonus. Decide whether the bonus is genuinely discretionary or an earned entitlement on stated conditions, and set the toggle accordingly.
- Set the period and targets. Add the performance period, the targets or criteria, and how targets are set and communicated for future periods.
- Set the calculation and maximum. Enter the formula or amount, any threshold, and the maximum payable so the exposure is known on both sides.
- Set the payment date. Choose a payment date inside the short-term deferral window and record it, rather than leaving payment to 'the usual payroll process'.
- Choose the leaver terms. Switch on the good-leaver carve-outs you want — death, disability, retirement, redundancy, end of term — and confirm the pro-rating basis.
- Set the clawback boundaries. Enter the recovery window and the triggers, then have both parties sign and give the employee a copy.
Frequently asked questions
What makes a bonus discretionary?
A bonus is discretionary only if it is not paid under a prior contract, agreement or promise, and both the fact of payment and the amount are decided in the employer's sole discretion. Announcing a formula, a target or a payment date in advance generally makes the bonus non-discretionary — regardless of a clause that says otherwise, and with direct consequences for overtime calculations.
Does a bonus change how much overtime I owe?
It can. A non-discretionary bonus paid to a non-exempt employee must be included in the regular rate and apportioned back over the workweeks the bonus covers, with the additional overtime paid at that point. It is one of the most commonly missed wage-and-hour obligations, and it is why the discretionary-or-not question is not just wording.
Why does the payment date matter so much?
Because of the deferred-compensation rules. A bonus paid by the fifteenth day of the third month after the end of the year in which it stopped being subject to a substantial risk of forfeiture generally falls outside them as a short-term deferral. A bonus that pays later can be caught, and the penalties fall on the employee rather than the employer — which is why the date belongs in the document.
Can an employer take a bonus away if the employee resigns before it is paid?
Often, if the agreement says so clearly — but not always. Some states treat an earned bonus as wages payable on termination whatever the agreement says, and a forfeiture applied to someone who dies, retires or is made redundant is both harsh and frequently challenged. This template keeps the active-employment condition but adds good-leaver carve-outs with pro-rata payment.
Can the employer change the bonus criteria after the period has started?
Changing the rules after the work has been done is what turns bonus schemes into disputes. This template lets the employer set targets for each new period, but requires them to be communicated before the period begins and not to be changed mid-period except by agreement, or where an unforeseen event makes a target meaningless — in which case an adjusted target is set in writing.
Is a clawback enforceable?
It depends on the trigger and the recovery route. A clawback for misconduct, a restatement or an award based on inaccurate information is far more defensible than an open-ended right of recovery. The mechanics matter too: state wage-payment statutes regulate deductions from pay, so ask for repayment on invoice and deduct only where the state permits it and the employee has separately authorised it.
Can the agreement require the employee to keep the bonus confidential?
Not their own pay. Federal labor law protects employees who discuss pay and working conditions with each other, and several states prohibit employer bans on wage discussions outright. Confidentiality should cover the employer's business information — financial data, customer information, the inputs to the calculation — not the employee's own compensation.
Does a bonus count towards retirement-plan contributions?
Only if the plan document's definition of compensation includes it. Plans differ, and treating a bonus one way in payroll and another way in the plan creates an operational failure that has to be corrected. Check the plan document and record the position in the agreement so the employee knows what to expect.
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Disclaimer
This template and guide are for general information only. They are not legal or tax advice, and no attorney or regulator has reviewed or approved them. Wage-payment rules, deduction limits, pay-transparency statutes and the treatment of earned bonuses differ by state, and the deferred-compensation rules are technical — take advice before adopting a bonus scheme.
