Advice For Year-end Bonus Payouts

Many businesses determine employee bonuses at the end of the year. The timing of bonus payouts and when the those bonuses can be recognized depend upon whether the business is a accrual or cash basis company. Sometimes even though a bonus is determined at the end of a tax year and recognized on the company's books in the current year, the bonus is actually not paid out to the employee until January of the following year, and reported on the employee's w-2 in the following year. Rules do apply: 

Accrual Basis

Accrual based firms are not able to deduct 2015 bonus amounts in 2015 if the business decides not to pay until the following year. Deferred payments in certain C Corp and S Corps 50% ownership or more for C Corp, and any percentage of ownership for S Corps are included.  

Cash Basis

For a cash basis business, a bonus paid to a majority owner are deemed paid in the current year if the bonus is determined and the company has the cash to cover the bonus in the current year. This applies regardless if the business delays the payout until the following year.

Be sure of which basis your business operates to ensure proper reporting on your books and to your employee's and owners, it could prove to be a big difference on your bottom line and tax picture.

AIPB, (December 2015), The General Ledger, Vol, 32, No. 12.