Profit sharing plan is a kind of retirement plan that gives the employees a share in the profits of the company. This is a good way of transmitting a sense of ownership towards the employees and making them proud to think about what they are contributing towards the profits of a company.
The profit sharing plan usually offers a percentage out of profits that are set aside for sharing according to the earning each employee is making. For example, ABC motors have decided to share 15% 0f the total earnings in 2020, i.e. $ 50,000. Out of this $50,000 each employee will receive proportionately as a percentage of total salaries they earn.
For example, there are three employees with salaries of $30,000, $30000 and $60000 making a total of $120000.
Employee 1 : $50000 x 30000/120000 = $12500
Employee 2 : $50000 x 30000/120000 = $12500
Employee 3 : $50000 x 30000/120000 = $25000
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