Are Bonuses a Deductible Expense for Corporations?

Bonuses can be paid to employees in a corporation to act as a motivation for them. Bonus payments become tax-deductible if you run a business through a corporation. However, some types of compensations may appear as deductible bonuses, but they aren’t in real sense. These are the types of bonuses you need to know. 

Types of bonuses

bonus

Cash bonuses

These bonuses are paid to employees as deductible wages. They serve as compensation for services delivered before bonus payment. They are not a gift. Cash bonuses are deducted and included in the w-2s of the employee. However, the corporation must withhold the income taxes to pay the employer for Medicare and Social Security, like for a regular wage or payment.

Property bonuses

Property bonuses are deducted and included in the W-2 form of the employee. They are subjected to salary and wage deductions. It is not easy to figure out what the bonus is worth. For example, if a worker is given a printer, the business no longer needs, you use the value of the printer at present, not what was paid for.

Reasonable employee compensation.

The IRS has to figure out if the employee’s compensation is of the unreasonable amount or not. If unreasonable, it is not deductible to the corporation. The reasonableness is based on facts around each employee. Some of them are duties of the employee, skillset, time commitments, the complexity of work, etc. An amount might be deductible to one employee and unreasonable to the other.

Achievements awards and gifts

Achievements and gifts issued out to employees are a different case from bonuses, and different tax rules apply. Yearly achievement awards are limited to $400 for every employee. If the corporation has certified plans in place, that amount could be boosted to $1,600 per employee. Gifts and awards can be issued as movie tickets, holidays, and catered parties. They are regular business expenses, not employee compensation. 

How bonuses are paid

receiving bonus

Bonuses are one-time or annual special-purpose payments issued to an employee. It comes as an addition to the salary payment of the year. Corporations decide who to give, the amount, and when to pay. The bonus can appear in the regular paycheck or a separate check. There is also a holiday bonus for employees who meet their sales objectives. Some bonuses may be contractual, e.g., salespersons, once they meet a certain goal or for overall profitability.

Deducting employee bonuses as a business expense.

It is advisable that you issue bonuses as a one-time event. Don’t make employees think bonuses are an annual reward. If you predict you will make a profit in the coming year, pay bonuses to employees and win the goodwill of the employees, especially around the holidays. Bonuses are a deductible business expense. If you choose to give some employees and leave out some, ensure that you have a clear distinction on the difference.

Bonuses to employee/owner

Bonuses for employees and owners can be deducted under specific circumstances. For example:

 

  • C Corporations-they deducts bonuses to owners/shareholders with a 50% or more ownership when bonuses are issued.
  • S Corporationsdeduct bonuses to all owners and shareholders who own shares at the time the bonus is paid.

Sole proprietors, limited liability companies, and partnerships don’t have their bonuses subjected to deductions. The reason is the IRS considers them to be self-employed.

Bonuses as taxable income to employees

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The employee benefits are taxed under employee benefits. One must withhold federal and state income taxes and FICA taxes as well. You also need to include the additional Medicare tax, unemployment taxes, and Social Security Maximum.

Bonuses and overtime

Bonuses are either discretionary or non-discretionary. Discretionary bonuses come by surprise e.g., employee performance bonuses. This bonus is not given every year. IRS considers holiday bonuses to be discretionary.

Non-discretionary bonuses are imposed by the employer, union contract, or an employment contract. The receiver expects to receive the bonus. These bonuses must be added to the weekly gross pay for workers who are eligible for overtime. 

Calculating bonus amounts for employee taxes

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Bonuses supplement the wages of an employee. There are two ways to figure taxes for bonuses:

As part of the employees’ regular pay. Add the bonus amount to the paycheck and calculate the federal and state income tax and withhold FICA taxes for employer and employee.

As separate paycheck. Calculate the income taxes using 22% on this amount. Withhold FICA charges at usual rates plus any state income taxes.

If you are not withholding taxes from employees, check. Add a bonus amount to the employee’s current paycheck and all withholdings as if it were a regular check. That could result in high or low taxes. See withholding procedures hereby IRS.

As you calculate bonus for employee tax, also include:

  • Employer part on FICA taxes on the bonus amount
  • Report the bonus with other payments on Form 941
  • Tax report
  • Quarterly wage

Changing employee withholding for bonus

Any time you decide to give your employees a bonus, ensure you provide them with the chance to change their withholding authorization (Form W-4) for that particular paycheck so they can change it back for subsequent paychecks. Many employees like changing the bonus check withholding so they can receive more bonuses. However, they must pay all the necessary taxes.

 

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