That small business you started out of your garage or at your kitchen table has blossomed into a full-scale enterprise, thanks in part to your team of great employees. The salesperson cultivated, nurtured and converted a record number of leads. Your production staff exceeded their performance measurements beyond what they thought was possible. Your Admin. Assistant worked hard to keep you sane and to keep the office running smoothly.
Time to break out the checkbook and to issue some bonuses. Can you deduct those bonuses as an expense on your tax return?
Maybe you’re one of the lucky bonus recipients and are wondering if you need to claim your bonus as income.
Here is a brief run-down of how you need to account for bonuses at tax filing time:
Can You Claim Bonuses As a Business Expense?
Bonuses can be claimed as a business expense if they were given in exchange for services, such as your salesperson exceeding their quota. However, if you distribute the bonuses as a holiday gift at the annual party, you can’t claim the bonus as a business expense.
You must distribute the bonuses within the same tax year in order for you to claim them as an expense on your tax returns (provided they also meet the requirement above).
There is one exception to the tax year rule: if you use the accrual method for paying your taxes, you can claim the bonuses as an expense if they are paid out within the first two and a half months of the new tax year.
Payment To Relatives
If your record-breaking salesperson is also a family member, they will need to report their bonus as income in order for you to claim their bonus as an expense.
If You Are An Employee…
The IRS regards bonuses as “Supplemental Wages.” If you scored a bonus at work, your employer will likely use one of two methods in calculating taxes.
If you received a separate bonus check, your employer will most likely deduct 25% for taxes. This is known as the percentage method.
In come cases, your bonus may have come as part of your regular paycheck, and instead your taxes will be based on the total amount of your paycheck, including the attached bonus. This is known as the aggregate method.
If your bonus is large enough to bump you into the next tax bracket, and if you’re sure you’ll be making less money in the coming tax year, see if your employer would be willing to defer your bonus. He or she may not want to do that, but it won’t hurt to ask in the meantime.
Giving and receiving bonuses can be rewarding (especially for the employee) and they provide recognition for a job well done. However, there can be some tax headaches for both employer and employee, so it’s helpful to be familiar with the tax regulations on both sides of the equation.
Bonuses can be claimed as a business expense under certain limitations, and employees will have to claim the bonus as income. If both parties stay current on tax regulations regarding bonuses, tax time will be relatively pain-free.