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Can Paying Bonuses Reduce Your Taxes?

At the end of the year, many businesses are in search of ways to lower their net income and reduce the amount of taxes they owe to Uncle Sam. For this reason, they often award bonuses to their employees. However, according to a tax accountant in Los Angeles, awarding bonuses may not always reduce your taxes. Learn if you are in a situation where paying bonuses might benefit you.

S Corporations

First, S Corporations have the ability to write off the bonuses they pay to owners and shareholders. However, they have to own the shares when they are paid the bonus.

C Corporations

If you have a C Corporation, you can only deduct a bonus that is paid to an owner or shareholder with 50 percent or higher ownership.

Sole Proprietors/Partners/LLCs

According to a tax accountant Los Angeles, whenever a bonus is paid to a person who runs a sole proprietorship, LLC, or partnership, the IRS will not allow the write-off. This is because these individuals are considered to be self-employed.

Other Companies

Any other company that pays a bonus can deduct them as a business expense on their tax return.

How Much to Pay

Once you understand whether or not bonuses are deductible, you can determine how much to pay out. Typically, most people try to balance the amount they pay out with the amount they can reduce their taxes by. However, they also try to use bonuses as a way to reward employees.

If you are using bonuses solely to reward employees, you might want to consider other objectives to motivate them to succeed. After all, there is some evidence that suggests that companies might not get back in return from the employee in terms of work ethic what they pay out.

If you have questions about how bonuses will affect your company financially, you might want to talk to a tax accountant in Los Angeles. He or she can provide you with helpful advice to make the best decision for you needs.

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