Definition:
Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages. Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to employees, but are considered an expense of doing business and are, in most cases, a tax benefit to the employer.
Bonuses may also be paid to shareholders and owners of a company. The tax benefit of these payments to the company is limited, depending on the type of legal entity. For example:
- S Corporations can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.
- C Corporations can only deduct bonuses for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.
Bonuses cannot be paid to sole proprietors, partners, and limited liability company(LLC) members, because the IRS considers them to be self-employed.
