How Do I Report Company Bonuses?

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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.

 

Work Pays In More Ways Than One: Work-Related Deductions

Dan MacDonald
Dan MacDonald

 

 

Previously we discussed deductions for job seekers. What if you’re content to stay with your current job and have no desire to pound the virtual payment in search of a new gig? You’re in luck too because you may be able to deduct some of your work-related expenses for your present job.

Unreimbursed Employee Expenses

If you pay job-related expenses that are not reimbursed by your employer during the year, you’re in luck. Here are the guidelines for such expenses:

  • Paid or incurred during the tax year
  • Ordinary expenses: These are expenses that are common within your industry. If you’re a contractor, you could write off a portion of those new power tools you purchased, but you may not get away with the same if you write code for a living.
  • If the expenses are necessary, e.g. helpful to your business or trade.

Common Deductible Expenses

Some of the more common employment-related expenses include:

  • Dues for professional, business or civic organizations within your industry
  • License renewal fees
  • Passport required for business travel
  • Subscriptions to professional or trade publications related to your occupation
  • Travel, transportation, lodging, meals and entertainment as they relate to your line of work
  • Uniform expenses if required for your job and if your uniform isn’t suitable for off-hours use.
  • Union initiation fees and dues

You can see a more comprehensive list of deductible expenses in IRS Publication 529.

Educator and Home Office Deductions

If you are an educator, you will also be able to deduct certain expenses.

K-12 teachers, principals, aides, counselors who work at least 900 hours during the school year may be eligible to deduct the cost of books, supplies, equipment (including computer expenses) and other classroom materials. College professors may be able to deduct research-related expenses.

The home office deduction is available under certain circumstances; if you use part of your home exclusively for business purposes and it is your principal place of business where you meet with clients or customers.

Your home office arrangement must also be for the convenience of your employer; many employers are trying to reduce their own overhead by having some of their staff work from home, so this trend could be in your favor when tax season rolls around.

As with anything IRS or tax-related, you’ll only be able to deduct a percentage of your overall expenses, provided those expenses meet the guidelines for unreimbursed expenses.

How Much is Deductible?

The formula is roughly the same as for job search-related expenses: any amount in excess of 2 percent of your AGI. For example, if your AGI is $20,000, you can only deduct anything in excess of $400.00. This is taken after you apply the 50-80 percent limit on meal, travel, and entertainment expenses (if they apply).

If you’ll be preparing your own tax return, you’ll need to attach Schedule A (Itemized Deductions) to your 1040 form and state these expenses under “miscellaneous expenses.”

Be sure to keep accurate records and hold on to any receipts or bills that are associated with the expenses you’re deducting. You’ll want to have them handy if the IRS should come calling.

IRS Publication 587 has more detailed information on calculating and reporting your work-related deductions; all information is based on the 2014 tax year. 2015 tax year information is not yet available.

If you’re not a tax code whiz, don’t worry. We have qualified tax advisers on hand that will answer your questions and even prepare your return for you when the time comes. Just click the white “Start Chat” button in the upper right-hand corner of our page, or give us a call. We’ll be glad to help.

 

 

 

 

Tax Deductions for Job-Seekers

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If you’re taking looking for a new job in the wake of the recovering economy, you’re in luck: some of your job search expenses are tax deductible. There is one catch: the deductions only apply toward a new position within your current industry. However, you won’t be able to deduct job search expenses if you’re looking for your first job or are changing fields.

Who’s Eligible

In order to take the deduction, you must either:

  • Be seeking a new position within your field while currently employed, or
  • Seeking employment in your regular line of work after a period of unemployment.

In other words, if you’re currently working in customer service and are looking to be the next tech god or goddess, expenses for that job search aren’t eligible in the eyes of the IRS.

Eligible Expenses

A good job search can be expensive over time. Here are the expense the IRS is willing to allow:

  • Resume expenses: Printing, snail mail postage and resume writing service expenses are allowable under IRS tax codes. Just be sure to keep all receipts that are related to your resume expenses in case you will need to substantiate these costs in the future.
  • Travel: If you are traveling out of the area to seek work in that community, keep track of your mileage, meal, and fuel expenses. If you’re traveling out of the area on personal business and decide to seek work at the same time, be sure to document the percentage of time and expense devoted to job search activities. Hold on to any receipts related to your travel expenses.
  • Agency Fees: If you pay an agency or outplacement firm to assist you in finding your next job, keep any and all agency receipts documenting the fee(s) paid to them.
  • Long Distance Phone Calls: If you make long distance calls related to your job search (phone interviews, for example) print out your phone bill and highlight the related phone numbers. Mark them as “long distance phone expense: Bay Area Tech.” By marking your phone bill as soon as you get it, you’ll save yourself the hassle at the end of the year when you may not remember what all those long-distance numbers were for.

How to Report These Expenses

If you’re using the DIY approach to filing your taxes, you’ll need to list these expenses on Schedule A of your 1040 form under “miscellaneous expenses.”

Here’s the catch: You can only deduct job search expenses that exceed 2 percent of your Adjusted Gross Income (AGI). Let’s assume your AGI is $20,000. You can only deduct eligible job search expenses that exceed $400.00, or 2 percent of $20,000.

A job search can be expensive: resumes, travel, long-distance calls and related expenses can add up over time. If you’re looking for a new job within your field, you can deduct some of those job search expenses.

If the thought of calculating these expenses or interpreting IRS tax code makes you uneasy, check in with a qualified tax prep advisor. He or she can answer your questions, help you determine qualifying expenses, and file your tax return on our behalf.

If you need a qualified tax pro to help you sort through the confusion, we’re here to help. Just click on the white “Start Chat” button at the top of the page or give us a call.