Year-End Bonuses Rules

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Paying employee bonuses is a common year-end tax planning choice.  Many business owners would rather reward their employees than pay more in income taxes.

A few rules to remember:

  • Cash-basis employers should date the check before the end of the year.  I highly recommend that they also be cashed before year-end.


  • Accrual-basis employers can declare that they are paying a year-end bonus and deduct it on their 2013 return as long as the bonus is paid by March 15th (2 ½ months after the year-end).  This won’t work if the company retains the right to modify or cancel the bonuses at any time before payment.  In that case, the deduction cannot be taken until the year the bonuses are paid.  The same is true if the bonuses cannot be paid until the company’s board of directors approves the bonus.