When it comes to compensation and benefits, the end of the year is a busy time for employers. It’s a time to wrap up matters for the current year and consider new policies for the coming year. Here are some actions to take into account.
Set year-end bonuses
Many companies choose to offer annual bonuses to employees. Bonuses are tax-deductible, but when do you deduct them? Assuming that you report your income and expenses on a calendar-year basis, then:
- If you are a cash basis business: Deduct the bonuses in the year in which they are paid. If you pay 2017 bonuses in 2017, they’re deductible for 2017. If you pay 2017 bonuses in 2018, they’re deductible in 2018.
- If you are an accrual basis business: Bonuses declared (and accrued) before the end of the year are deductible in this year if they are paid within 2½ months after the close of the year (provided that the employee is only required to be employed on the bonus declaration date and not on the bonus payment date). However, bonuses paid to S corporation shareholder-employees are not deductible until paid. For owner-employees in a C corporation, the bonus is deductible only when paid in the case of a personal service corporation or for majority (more than 50%) owners.