Bonuses can be used to reward employees for achieving a certain goal or completing a specific project. They can also be given to employees who have outperformed in their position over a certain period of time. A bonus is a great reminder to an employee that you value their efforts and may even make them more loyal to your company. Before deploying employee bonuses, consider what type of bonus you are looking to give and the tax and budgetary ramifications for doing so.
Types of Bonuses
Before handing out a bonus, you will want to decide what type of bonus this is and communicate the type with your employees. This ensures that there is no confusion on expectations for bonuses in the future.
According to Patriot Software’s Mike Kappel, “Discretionary bonuses are bonuses that employees do not expect.” These bonuses may be deployed after a particularly special project or time period. It should be communicated to the employee that this is a discretionary bonus so that they do not expect this same bonus in the future.
A nondiscretionary bonus is a bonus an employee expects to receive because it was promised to them. These might come at the end of the year, or it might be in the employee’s contract. If it is written in the contract, it might be used as a motivation tool. For example, if they sell a certain number of units they receive a certain amount of bonus on their paycheck. Some companies reward employees for creating systems that save the company money, and their policy is to give that employee a percentage of what their system saved. This would be an example of a nondiscretionary bonus because the employee would be expecting it on their paycheck.
Tax Ramifications and Benefits
Just like their salary, employee bonuses are taxed for the employee, however they can be deducted on the company’s taxes, according to GRFCPA. In general, an employee will be taxed the year they receive the bonus, and a company can deduct the amount from their taxes in the same year. An exception of this is if your company is an accrual-basis, then you can “currently deduct bonuses paid as late as 2 1/2 months after the end of its tax year. In other words, a qualified calendar-year company has until March 15, 2021, to pay bonuses and still deduct them on its 2020 return” according to GRFCPA. If you know your company is an accrual-basis, you will want to consider more carefully when to deploy bonuses in order to reap the benefits on your taxes.
When considering deploying employee bonuses, first look at your budget and decide what you have room for. Whether it is a discretionary or nondiscretionary bonus, you may need to revise your plans in order to fit what your company has right now. 2020 and 2021 have been tough years for many businesses, so year-end bonuses or special bonuses for “a job well done” may not look the same as they did in 2019. Working this out in your budget and communicating with your employees will be an important part of determining when to give bonuses.
The timing of employee bonuses is dependent on your business, but considering the types of bonuses as well as the tax and budgetary ramifications will ensure you are in good shape.
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