Deducting Bonus Payments

Your Guide to State, Local, Federal, Estate + International Taxation

Many employers, after having a successful year, will share this success with their employees in the form of bonus payments. These employers tend to have happier employees and better employee retention. The question for the employer is when does he/she get to deduct these bonus payments?

If the company is on the cash basis, the answer is easy. You deduct the payments when they are made. If you are on the accrual method of accounting for tax purposes, the answer gets a little more difficult. Under the accrual method, the deduction is recognized when all events have occurred to establish the liability and the amount can be reasonably determined. This means the earlier of the date (1) the payment is due or (2) the event fixing the liability occurs. The final requirement is that the amount must be paid within 2 ½ months of year end.

By Rick Schultz, CPA