4 Tax Rules to Keep in Mind for Year-End Bonuses

Rules_Bryant & AssociatesLet’s start with a hypothetical: 2014 has been a fantastically profitable year so far for your business, and you want to include your staff in the company’s good fortunes with year-end bonuses. The first option that comes to mind is cutting your workers a check to reward them for their hard work this past year, but there are things you have to know about what cash bonuses mean for your business. It’s also good to consider alternatives to doling out cash, including contributions to retirement plans and stock sharing options.

If the end of your business year falls on December 31, the following tips compiled by our team of accounting specialists at Bryant & Associates, P.C. in Lincoln will be invaluable to helping you make a decision about the best way to give your workers year-end bonuses.

Consider How to Time Your Payments

Should you pay bonuses before the end of the year or wait until the beginning of 2015? If you give your workers bonuses before the end of the year, you can deduct them in 2014. If, on the other hand, your business works with accrued revenue (that is, you recognize revenue before you have the cash in hand), you can declare bonuses this year and have them deducted on 2014’s taxes, but actually pay the bonuses in 2015. This applies only if the bonuses you’re giving are to an unrelated person (in other words, not the owner or an immediate family member).

Note: Corporate minutes and other company records should reflect bonus declarations. It’s always wise to keep track of these declarations in case you need to refer to them later.

Rise in Medicare Tax for High Earners

If you have employees with substantial compensation, they should be made aware of the recent additional 0.9 percent Medicare tax which applies to many forms of taxable income—this includes wages, tips, commissions, taxable fringe benefits, and other forms of compensation which are considered taxable. This additional 0.9 percent Medicare tax is applied to amounts over a set threshold amount for your worker’s filing status, which is $200,000 for singles and $250,000 for those filing jointly.

For example, if a single employee with a salary of $170,000 receives a $40,000 year-end bonus, $10,000 of his or her earnings will be subject to the additional Medicare tax.

Note: Once an employee’s earnings exceed $200,000, you as an employer are responsible for withholding the additional Medicare tax regardless of the employee’s filing status.

Giving Stock Options Rather Than Cash

There are many good reasons to consider giving year-end bonuses of company stock rather than cash— for instance, this method can give employees a sense of increased ownership of and investment in the business, and ties compensation to the health and growth of the company.

If you feel that this is a good option for you and want to give stock in your corporation as bonuses, you may want to tell your employees (without giving them tax advice) about a Sec. 83(b) election. This reports the stock as compensation immediately so that any future appreciation on the principal amount will be taxed as capital gains.

Funding a Qualified Retirement Plan

This is a good option for those forward-looking employers and employees who want to use company profits to form a qualified retirement plan, such as a profit-sharing plan. There is a limit set by law on the amount that can be added each year, and contributions are also required to be non-discriminatory (in other words, contributions cannot favor the owners and managers).

If you obtain a filing extension, you can make 2014 contributions to a qualified retirement plan until October 15, 2015. If you miss the deadline to set up one of these qualified plans, however, there are still things you can do, such as using a SEP plan which can be set up and funded by the October 15 due date.

Contact Bryant & Associates, P.C. at (402) 423-0404 Today!

As you can see, there are many options for giving year-end bonuses to your employees, and the benefit of each to you and your employees varies depending on your specific situation. If you have any questions or concerns regarding this post, don’t hesitate to give our firm of accounting specialists at Bryant & Associates, P.C. a call today at (402) 423-0404! As a full-service CPA firm in Lincoln, Nebraska, we specialize in accounting services tailored to the needs of small business owners, and we would love to put our expertise to work for you.

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