On average, companies spend almost $4,700 on each new hire. Between advertising open positions, screening candidates, and onboarding new employees, filling roles takes a significant toll on budgets. And that doesn’t account for the time your team invests in interviews.
What you’ll learn
What you’ll learn
Updated: July 5, 2025
Key takeaways
- Referral bonuses cut hiring costs from $4,700 per hire to between $1,000-$5,000 in rewards
- Choose from cash, tiered, or nonmonetary incentives like gift cards and extra PTO
- Clear eligibility rules and active promotion drive program success and employee participation
Tapping into talent pools recommended by your current employees can dramatically reduce these costs and time investments. But employees often need extra motivation to actively refer candidates for open positions. That’s where referral bonuses come into play.
This guide explains how referral bonuses work, the different types available, and key tax considerations.
What is a referral bonus?
A referral bonus is an incentive you offer employees who refer candidates from their networks that your company ultimately hires. These programs tap into your workforce’s personal and professional connections to find qualified candidates while rewarding employees for helping expand your team.
Types of referral bonuses and when to use them
There are a few different ways to structure a successful employee referral program, so choose whichever works best for your business.
Cash bonuses
The most common referral bonus option is a straight cash bonus. Every time you hire someone who one of your employees suggests, you pay that employee the referral bonus amount. You can set the amount as high or low as you want, but for a ballpark, $1,000 to $5,000 is common.
Tiered rewards
In a tiered employee referral bonus program, employees receive rewards that increase in value depending on how far their referrals make it through the hiring process. For example, you might offer $250 for referring someone who makes it to the interview stage, $500 for referring a candidate who makes it to the final round, and $1,000 for referring the person you hire for an open position.
You can even offer an additional referral reward if the new hire stays with the company for a certain amount of time, such as a year after hiring. Using the tiered system helps motivate employees to recommend the highest-quality candidates, who then have the best chance of getting hired and succeeding in the role.
Nonmonetary incentives
If paying cash referral bonuses concerns you by pushing the bottom line too far, you can still implement an effective employee referral program with nonmonetary incentives.
These may include:
- Gift cards
- Event tickets
- Travel vouchers
- Extra paid time off
- Other work perks, like flexible work arrangements
Think about what your employees might like as a reward other than extra cash payments and consider using those as incentives for referral submissions.
How a referral bonus program benefits your hiring strategy
At first, employee referral programs may sound like extra expenses for your business to bear. But with a little planning, they can save you money and have a positive influence on recruitment strategies. Some of the benefits of employee referral bonus programs include:
- Reducing hiring costs: By cutting out some of the time-consuming steps of traditional recruitment methods (posting your job listing online, advertising it, and thoroughly vetting a long list of candidates), hiring through a referral process can save you money. It may also reduce your time-to-hire, so you find qualified employees to more rapidly fill your open roles
- Improving employee engagement: These referral bonus structures can also encourage your current employees to be more engaged in the hiring process and in your workplace in general. If they have the opportunity to earn rewards for successful referrals, they’ll be more motivated to understand what kind of candidates you’re looking for so they can refer the best people for the jobs
- Boosting retention through quality hires: Each time one of your current employees leaves, you have to start the hiring process again. Improving employee retention means your workers stick around longer, and you don’t have to hire replacements as often. Successful referral programs help you hire quality employees who improve retention rates, further reducing your overall hiring costs
How to design an effective referral bonus program
When putting together your program, keep these factors in mind.
Setting clear objectives
Consider exactly what you want to achieve. Are you trying to reduce the cost-per-hire metric in your workplace? Speed up the hiring process? Or find higher-quality candidates? Your objectives could be a combination of these or others. Understanding your goals will help you create a program tailored to your specific objectives and keep everyone on the same page.
Defining eligibility
With any bonus program, it’s important for employees to understand how they can earn a bonus payout. Clearly outline what workers need to do to receive your employee referral bonuses. Is the bonus only for employees who refer candidates you ultimately hire? Or are there bonuses for referring candidates who only make it to earlier stages of the hiring process? Define whether all employees can participate in the program.
Structuring the payout timeline to align with hiring goals
Finally, structure the bonus payouts to go out after you have confirmed that the employees helped you reach your hiring goals. For example, you might only pay the bonus after the referred employee has completed onboarding.
What to know about referral bonus taxes and reporting
Bonuses are taxable income, so employers are required to withhold federal taxes from them. For bonuses less than $1 million per employee per year, you can either:
- Withhold a flat rate of 22% (try our bonus calculator to automate)
- Combine the bonus with the employee’s regular income and withhold tax as usual from the total amount
Make sure you disclose your tax withholding method to employees and remind them that they must also report their bonuses as taxable income.
How to measure the success of your employee referral program
The only way to know whether your employee referral program is helping you accomplish your objectives is to measure its success. Try tracking metrics like:
- Cost-effectiveness: Compare how much you’re spending on your referral program to your reduced hiring costs. Did your cost-per-hire go down more than your referral bonus amount?
- Quality of hires: How are your new hires from the referral program working out? Track their performance reviews, productivity, and the amount of time they stay with your company compared to other hires
- Employee satisfaction and retention: Also, use employee satisfaction and retention rates to gauge whether your program is making your existing employees stay with the company longer
Setting up a referral bonus program can have a positive impact on your bottom line
A well-designed employee referral bonus program can help your company encourage a steady stream of pre-vetted job candidates. On one hand, employers can feel confident that staff members are sharing roles with people they already trust, reducing hiring uncertainty. Current employees, meanwhile, get the chance to bring talented people they know into the fold and earn an incentive in the process. To manage it all, most payroll software solutions can keep tracking streamlined and organized. Best of luck as your team grows and you develop your own referral policy!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.