Discussion:Employee Christmas Bonuses
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Discussion Forum Index --> Tax Questions --> Employee Christmas Bonuses
| 7 February 2007 | |
| Advised client he needs to have Christmas bonuses added to employees W-2's if they are cash/cash equivalents, as with a lot of clients he doesn't want the hassle. The total amount is $3500 for 20 employess, he is an S corp. He has exposure for unpaid FICA/MEDI but would it be more appropriate to treat it as a nondeductible item or distributions to him (then he personally makes gift?) Real question is the FICA/MEDI his only exposure or since he did not treat the bonuses as compensation to employees would the IRS consider this a nondeductible item? | |
| 7 February 2007 | |
| Non deductible to the S corp if not included in income for the employees. Sure he can take it as a distribution to himself and use it as gifts to employees; either way it is income back to him from the S corp. | |
Msmith7305 (talk|edits) said: | 7 February 2007 |
| Sandysea-
I will take gentle exception to your take on this. If his intent was that this was compensation, or taxable fringe benefits that were supposed to be reported, the mere fact that he failed to report them correctly does not change the deductibility of the payment. You can advise him of his responsibility (and the consequences of failure to correctly report) but if they are truly payments for services, then they are deductible. The recipients are responsible for reporting the bonuses as income regardless of whether they are reported on a W-2, 1099, etc or not. The IRS may try the "you didn't report them so they are not deductible" trick, but if you can susbstantiate the business purpose then they are allowable and he will just have to correct the reporting and pay all appropriate taxes, interest, and penalties. If he truly meant them as gifts, and they truly do not represent compensation for services, then I would agree that they are not deductible. But I'm willing to bet that he doesn't see it that way. | |
| 7 February 2007 | |
| That is cool Ms....my take however is that they are "Christmas bonuses"...usually not services related, just the extra $ in the account of the employee as a thank you. If IRS later reclassed those as salaries for employees, then this client could essentially have to pay penalties, etc. for not reporting them as wages....easier and less crucial I think to take them in 2006 as distributions and personal gifts.
You have a very valid point however; yes, are they deductible on the S corp without quantification? Sure...but because they are not deductible under the law because they were not reported correctly....I would take them as distributions myself :) How many of these employees know that they should be picking them up as income aside from their W-2 wages? | |
Msmith7305 (talk|edits) said: | 7 February 2007 |
I hear what you are saying! I'm sure the recipients are figuring they have a tax free bonanza. I do not follow how you might think a "thank you" from an employer would not be service related and, therefore, not includible in income. Heck, straight from the Master Tax Guide: "a distribution of cash, a gift certificate, or a similar item of value that is readily convertible to cash must be included in the employee's income". I think that about covers what they received.
As far as I know, there is no law that says an incorrectly reported item is not deductible. If there is, I would truly like a reference to it as that would be great ammunition to hit these clients with who continue to give us these headaches! | |
| 7 February 2007 | |
| Sandysea and MSmith7305 thanks for input, I belive the client looks at these as gifts to valued employees, that said he assumes he'll get a deduction. | |
Msmith7305 (talk|edits) said: | 7 February 2007 |
| ERSCPA-
If truly GIFTS and not a reward for service I believe they are not deductible. | |
Tfortaxes@msn.com (talk|edits) said: | 7 February 2007 |
| bonus are a form of wages and go on the W2. Slice it, dice it, chop it up and mix it all around....it goes on the w2 | |
