How to calculate profit sharing
Some companies introduce profit-sharing plans as a way to create an incentive for employees to work harder and more efficiently. To implement a profit-sharing plan, executive management or the board of directors decides what percentage of pre-tax profit will be available for the profit-sharing pool. The funds may be distributed at the end of each month, quarter or year, depending on what management decides. The contents of the profit-sharing pool are divided among the participating employees based on a method already determined by management, such as percentages based on position level, base salary or number of years with the company.
Determine the amount of money available for the profit-sharing plan by multiplying net income by the percentage allowed for profit sharing. For example, if the company elected to allocate 10 per cent of net profit to a profit-sharing plan and the company has £19,500 in net income, allocate £1,950 to the profit-sharing pool.
Obtain a list of each employee-allowed percentage of the profit-sharing plan as determined by management. The total of all the employee percentages should equal 100 per cent to distribute the entire amount of the profit-sharing pool.
Multiply each employee's percentage by the amount of money in the profit-sharing pool to gain the amount of profit-sharing funds due to that employee. For example, if an employee's percentage share is 15 per cent, multiply 15 per cent times the £1,950 of profit-sharing money available to gain a profit-sharing distribution for that employee of £292.
Continue calculating the profit-sharing amount for each employee until you have made all the profit-sharing calculations. To make sure your calculations are correct, total the profit-sharing amount for each employee to make sure it equals the total amount available for distribution. If the amount is off a few pennies, that is due to rounding and an allowable difference. If the amount is off by more than cents, review each calculation to find the error before preparing checks for the distributions.
- Net income for the profit-sharing period
- Profit-sharing percentage
- Employee percentage share