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IRS tells how to make bonuses tax deductible for employers

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in Compensation and Benefits,Human Resources,Office Management,Payroll Management

If you plan to pay out bonuses in 2013 for exemplary work employees do this year, that could complicate your organization’s tax planning.

The problem: The bonuses are based on achievement of end-of-year perform­ance goals. You know how much you’re going to pay out; you just won’t know exactly who is going to get how much until you tally up the year-end financials.

Now the IRS has clarified that em­­ployers can take a current-year tax deduc­­tion for a fixed amount of bonuses that will be paid to employees during the following year, even though the amount that each employee will re­­ceive, and even the identity of employees, aren’t known until after the tax year ends.

The catch: Your company has to use the accrual method of accounting and allocate money to a bonus pool.

The pertinent IRS rule is Rev. Rul. 2011-29, IRB 2011-49.

How it works

The IRS used this hypothetical scenario to show how the deduction would work out.

Mega Corp. pays bonuses to a group of employees. The minimum total amount of bonuses payable to all eligible employees is set before the year end and is based on a formula that considers Mega’s financial data as of the end of that year.

Bonuses are paid after the year ends and before March 15. Employees forfeit their bonuses if they terminated employment before the date bonuses are paid. Any forfeited amounts go back into the bonus pool and are split among the remaining participants.

Mega can claim a deduction for the full amount of the bonus pool, as long as the entire amount goes to employees to reward services rendered during the tax year.

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