3 ways to slash taxes on year-end bonuses — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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If you're the big cheese at your company, you can control your own tax destiny to a certain extent. For example, you can usually time year-end bonuses to your personal tax advantage.

Here are three tax-smart ways to pull down a healthy bonus at the end of 2005:

1. Collect your bonus later rather than sooner. Normally, you'd like the money as soon as possible. But in this case, collecting the payment a bit later—even just a few days—can make a big tax difference.

Reason: The bonus is taxable in the year it's received. So, you can postpone the tax for an entire year by postponing your bonus until 2006.

Let's say your last biweekly payday of the year falls on Friday, Dec. 30. If you're paid a $10,000 bonus on that day, the full amount is taxable on the 2005 return you'll file by April 17. But if you arrange to receive the bonus the next regular payday—Jan. 13, 2006—you won't have to pay tax on that amount until you file your 2006 return in early 2007.

2. Make yourself "whole." If you operate a cash-basis company and intend to pay bonuses in 2005 to increase your 2005 deductions, here's a way to take the sting out: Calculate the amount needed to cover your tax liability and arrange to receive that amount.

Divide the original bonus by the result of one minus the applicable tax rate. That's sometimes called a "double bonus."

Example: Suppose you're in line to receive a $10,000 bonus and you're in the 33 percent tax bracket. It will take a $14,925 bonus ($10,000 divided by 1 minus .33) for you to become "whole."

3. Trade in the bonus for a fringe benefit. Although cash can go a long way, equivalent fringe benefits are generally more valuable to highly paid employees. Reason: Fringe benefits are often exempt from income tax.

Example: An executive in the 33 percent tax bracket receives a $10,000 cash bonus and nets $6,700 ($10,000 minus
33 percent tax on $10,000). But a $10,000 fringe benefit can still be worth $10,000.

A laundry list of benefits potentially qualifies as tax-free treatment, ranging from employer-provided education to company-paid adoption benefits. However, be careful: Certain benefits are subject to annual limits and most fringe benefits can't be established just for the upper echelon of employees.

Final tip: If your company operates on a fiscal year schedule, rather than a calendar year, tax planning is a snap. For instance, suppose your company's tax year runs from July 1 through June 30. Simply have your bonus paid out early in 2006 to ensure tax deferral for you and a current deduction for your company.

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