Year-end is a time for Christmas parties, annual reviews and compensation adjustments, and in some cases, year-end bonuses. The year-end bonus check isn’t just for employees. Business owners can use this as part of their year-end tax planning. Paying taxes through withholding payments on a year-end bonus check is an effective way for a business owner to mitigate a situation whereby he/she has been late on estimates or possibly has not paid any estimated taxes during the year. Unlike quarterly estimated payments, tax withholding payments – no matter when made during the year – are treated as if they have been paid in evenly throughout the year. This is an effective way to avoid late payment, interest, and penalty assessments.
The year-end bonus check is also a great way to account for the personal usage of a company automobile by simply subjecting the amount deemed to represent your personal usage to income tax and including that amount on the bonus check at year end.
Don’t forget that contributions to a 401(k) plan can be up to 100% of compensation. 2017 limits are $18,000 for employee deferrals with a catch-up contribution of $6,000 for those over 50 years old. The maximum 401(k) deferral can be made as part of one year-end bonus check.
Check with your tax advisor to see if any of these options might be advantageous for you.
Frank J. Pedicini, CPA