Payroll
A Smart Move for Year-End Bonuses
Payroll and tax managers often look for savvy strategies at the end of the year to save small business clients some big money. A simple, yet smart one involves a long-standing tax break for bonuses paid by certain companies.
Dec. 07, 2016
Payroll and tax managers often look for savvy strategies at the end of the year to save small business clients some big money. A simple, yet smart one involves a long-standing tax break for bonuses paid by certain companies.
Tax break for accrual-basis companies: Normally, an employer may deduct bonuses only in the year they bonuses are actually paid to employees. For example if an fixes its bonus amounts in December and pays them before January 1, 2017, the bonuses are taxable to employees in 2016 and deductible on the employer’s 2016 return. Bonuses paid after December 31, 2016 aren’t taxable to employees, nor are they deductible by employers, until 2017.
However, if an accrual-basis company pays its bonuses within 2½ months of the close of the tax year, the bonuses are currently deductible. In other words, an accrual-basis company operating on a calendar tax year can pay out bonuses as late as March 15, 2017, and deduct the bonuses in 2016. The bonuses, which should be determined this year, are still taxable to employees in 2017.
Generally, if a bonus is issued as part of a regular paycheck, the employer can withhold tax at the same rate as the standard pay. For separate payments, taxes may be withheld at the standard rate or a flat 25 percent rate.
Be aware that the special tax deduction break doesn’t apply to bonuses paid to majority shareholders of a C corporation or certain owners of an S corporation or a personal service corporation. Bonuses paid to these individuals are deductible only in the year in which they are paid.