Tax Strategy

• When you are granted a bonus, you should request that your employer issue the funds as close to January 1st as possible. That is because you must pay taxes on that income by April of the following year or about 15 months in the future. During this period, you can place the bonus into a high-growth investment to help pay off the tax and eliminate your liability. For example, 15 months of a high-yielding bond going toward paying a 20 or 30 percent tax rate will eliminate a substantial amount of the bill.
  
  

Corporate Accounting

• Bonuses should be listed as a compensation expense and may be a separate line item on the income statement. Annual bonuses for employees must be written off directly as an expense against income. If the bonus is awarded for some multi-year contract that will have value for several years, it is possible to capitalize and depreciate that bonus expense. However, you should definitely consult with a certified accountant before taking this action.
  
  

Owners

• Bonuses that are awarded to owners are typically referred to as dividends and cannot be deducted from the pre-tax expenses. They must be awarded after paying taxes. However, if your corporate structure is an S Corporation, you can deduct the expense from those owners who have shares at the time of the bonus. In the case of a C Corporation, the owners must have more than a 50 percent stake in the company to deduct the bonus.
  
  

Calculating Bonus Taxes with Quickbooks

• With Quickbooks software you can easily calculate bonuses and taxes. On the Employees menu click Pay Employees and pick the one you would like to give a bonus. Next click the Create button and then the Earnings section. Hit the Bonus Payroll item and enter the value you would like to award them. Quickbooks will then calculate the taxes that must be paid.