Construction business owners are no strangers to workforce challenges. Skilled labor is hard to find—and even harder to keep. More contractors are exploring profit-sharing to reward performance, reduce turnover, and tie compensation to results.

However, to be practical, a profit-sharing plan must do more than hand out bonuses. It should align with your business goals, support retention, and be structured with tax efficiency.

Picking the Right Type of Plan

Profit-sharing can be structured differently, but most fall into two categories: qualified or nonqualified plans.

Qualified profit-sharing plans, such as a 401(k) with a profit-sharing component, offer the most tax advantages. Employer contributions are tax-deductible (up to 25% of eligible payroll), and employees defer taxes on the contributions until they retire. These plans also avoid payroll taxes on employer contributions.

Qualified plans are subject to IRS rules around eligibility, nondiscrimination, and reporting (Form 5500). For construction firms with consistent cash flow and a long-term workforce, the benefits usually outweigh the administrative burden.

Nonqualified plans, on the other hand, are more flexible. These are essentially bonus programs tied to company profits, project milestones, or other metrics. They can be customized by role or tenure and paid on your timeline. However, they don’t offer the same tax advantages—bonuses are treated as regular compensation and are subject to payroll taxes.

If your goal is short-term motivation, a nonqualified plan may work well. A qualified plan typically makes more sense if you focus on retention and tax savings.

Link the Plan to Performance
Profit sharing must be connected to something employees can influence to be effective. Construction teams typically do not respond well to vague or unpredictable payouts. Clear and measurable goals are essential.

Rather than tying rewards to top-line revenue, focus on net profitability. One common approach is to set aside a percentage of annual profits, such as 10 percent, and distribute it among eligible employees based on tenure, hours worked, or total compensation. You can also link bonuses to project-specific outcomes, such as early completions, strong safety performance, or meeting margin goals.

To build trust and motivation, employees need to clearly understand what metrics their bonuses are based on, how the payouts are calculated, and when the payments will occur. Consistent communication helps maintain engagement, and many companies find that providing quarterly performance updates keeps the plan in mind throughout the year.

Understand the Tax Implications

If your business uses the cash method, contributions are only deductible when paid—not when promised or accrued. Accrual-basis companies have more flexibility but must make contributions by the tax filing deadline (including extensions) to get the deduction.

S corporation owners should know that profit-sharing contributions can only be based on W-2 wages, not distributions. This makes reasonable compensation planning even more critical.

Also, don’t forget about job costs. Those bonus costs must be allocated appropriately if you reward employees based on project-level profitability. Otherwise, you’ll have inaccurate margin data and distorted project reporting.

Align Profit-Sharing with Your Bigger Goals

Profit-sharing works best when part of a broader retention and culture strategy. For example, layering a vesting schedule into a qualified plan can encourage long-term loyalty. Bonus structures tied to team goals can strengthen collaboration across roles. Consistent, transparent payouts show employees that their efforts directly impact company results.

Before you consider rolling out a new plan or revising an existing one, consult your financial advisor or CPA. They can help you weigh the tax implications, forecast cash flow needs, and build a compliant and strategic plan.