Financial Freedom 101

Piggybacking off our 401k and company matching post, a company perk young adults may not be aware of is company profit-sharing. This can be a more fruitful perk than you’d expect. For starters, compared to the maximum of $20,500 from company 401k matching. A company profit-sharing program can give you a maximum of $61,000 a year.

Profit-Sharing

A profit-sharing program is essentially a retirement plan. Based on a company’s earnings over a year the employee can receive a percentage of the profits. This program can be compared to receiving stock options or equity in a company that is publicly traded. If your company is not publicly traded and wants to share company equity with its employees, then the best way to do that is through a profit-sharing program.

This program is usually maxed out at 15% of your salary. They don’t always give you your 15% but it is safe to assume that number for a conservative approach. For some companies, this 15% goes straight into your 401K, other times it will be directly deposited into your bank account.

This program is solely funded by your employer, unlike the 401k matching program which is personally funded.

If you decide to leave a company with profit-sharing you need to account for how much you need to be making at your new company to offset the loss of the profit-sharing.

In a profit-sharing program, your true income is a summation of salary, bonus, and profit-sharing. If you go to a new company that does not offer profit sharing, but company matching instead, this number most likely will be lower than the profit-sharing you are getting now. So you need a higher salary to offset this loss and keep the total income where it is now or preferably higher.

How to Calculate Profit-Sharing

To calculate profit-sharing you will need to know a few things about the company. First, you need to have a rough estimate of the company’s profit over a year. Let’s say your company makes $10,000,000 a year. Next, you need to know what percentage your company is sharing with each employee, let’s use 15%. Third, you will need a rough estimate of the total value of all the salaries in your company. Let’s say $50,000,000 in salaries. Lastly, how much are you being paid? For this example let us use $75,000.

Employee = ($10MM * 15%) * ($75,000 / $50MM) = $2,250

So in this setup, your profit-sharing plan would give you $2,250. This is a tiny percentage compared to the maximum of $61,000 allowed per year for profit-sharing. If you change 15% sharing to 100% you’d receive $15,000. To receive the full $61,000 the percentage would need to be about 406.67% allocation.

Now the company is at liberty to give what they want to each employee. This kind of program is better suited to your performance within the company compared to a simple percentage match for a 401k. The more you help the company push forward the more you will be compensated for it.

When do you get Profit-Sharing?

This is usually based on how long you have been in the company. To find out the exact details on when you start to receive your share you will have to consult with HR and read up on your benefits package. Most companies have a cut-off in the month of July for receiving profit-sharing.

If Employee A starts on May 1st, 2021 and the company cut-off is July 1st, 2021. They will be able to receive profit-sharing on December 31st, 2021

If Employee B starts on September 1st and the company cut-off is July 1st, 2021. They will have to wait until December 31st, 2022 to receive any profit-sharing.

Closing Remarks

In the end, profit-sharing has the ability to provide more monetary benefits to an employee than a company 401k matching program. If you time your entry into a company correctly and you prove to be a strong employee, then you are setting yourself up very nicely for an additional salary bonus. But when you are leaving a profit-sharing company it is important to understand how to be properly compensated in your next job! Do not get short-handed and take a lower salary, you can negotiate!