It’s that time of year where we reflect on how our business did this this past year, and who thrived within your company. I’m sure your first thought is to give these stand out employee an end of the year bonus. This is generally done to show appreciation, as well as to motivate them to continue to produce in the year to come. But something most don’t think of is that these bonuses can and will most likely be taxed. So let’s take a look at some key points to consider when giving bonuses.
- Be sure to check with your accountant to make sure you can even afford to give these types of bonuses. And if so, how much can you afford to give. This is a time of year we want to be giving and generous, but be sure to work closely with your accountant or CPA in this area to be sure you don’t take too much away from all you did to have a successful year.
- Make sure that you do know that end of year bonuses are subject to the same taxes as your employees regular pay. Some states might have a circumstance where they will withhold for supplemental payments, which includes payments. Be sure to check with your state to see if you fall under this withholding rate. Your accountant should also have this information for you.
- If you happen to report on a cash basis, then bonus’ issued before the year ends can is deductible within this year. This counts even if your employee happens to not deposit or cash the check until after new years. If you happen to report on an accrual basis, bonuses can be authorized this year that will ultimately be paid in the following year, this will allow them to get a tax deduction now.
- What should you do if you decide before the year ends that certain employees will get a certain bonus, but you haven’t decided which employees get which amount until next year? Well the IRS informs that it is possible to accrue the total amount of the bonus this year, which then allows you some additional time to give out the bonuses individually after the new year begins.
- You might want to give you employees the option of deferring their bonuses until a future time even as far out as when they retire, or they can receive them right away. There are some restrictions that apply to deferring this compensation. Choosing to defer is usually done so with the thought that taxes will be lower when the compensation is received. Obviously it is impossible to know if that will happen or not, but deferring can be a good option to add to the finances of your retirement.
Whatever you as an employer decide to do with bonuses, just be sure to follow all guidelines as advised to you by your accountant or CPA. And be sure to tell your employees with some personal touch other than just money how much you appreciate their work this year.