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Everything You Need to Know (Taxwise) About Year-End Bonuses

By BarbaraWeltman, Guest Blogger
Published: December 11, 2014

If your business can afford it and you want to reward employees, year-end cash bonuses may be the way to go. In providing this additional compensation, understand what it means from a tax perspective.

Bonuses are treated like other pay

They are subject to income tax withholding, FICA, and FUTA taxes in the same manner as regular pay. In figuring the cost of a bonus to you, factor in employment taxes. For example, if an employee earning $65,000 is given a $5,000 year-end bonus, the cost of that bonus to you is $5,382.50 ($5,000 + $382.50 employer share of FICA tax).

When withholding income taxes on the bonus (called “supplemental pay” by the IRS), there are several options:

  • Treat the bonus as part of regular compensation (a single check) and figure withholding accordingly (using standard withholding tables).
  • Opt to withhold a flat amount of income tax on the bonus. The flat rate is 25% (39.6% for bonuses over $1 million, something not likely in a small business).
  • Combine the regular pay with the bonus for figuring withholding taxes, but take the additional taxes only from the bonus check (this is illustrated in IRS Circular E.

If the bonus puts an employee’s pay over $200,000 for the year, you must also withhold an additional 0.9% Medicare tax on any taxable compensation over this dollar threshold. This requirement applies regardless of the employee’s marital status or income tax withholding. There is no employer matching of this additional Medicare tax as there is for the portion of FICA that covers Medicare taxes.

Employees may ask to have additional income taxes withheld from the bonus check to cover their expected tax bill for the year (e.g., you withhold a flat 25% but an employee expects to be in a higher tax bracket for the year). Employers must comply with employee requests for additional withholding.

Note: Special rules not discussed here apply if employees opt to defer the receipt of a year-end bonus (e.g., to receive it upon retirement).

Accrual basis businesses

If you report on the accrual method of accounting, you have greater flexibility on paying the bonuses. As long as you declare them, and put this in writing (e.g., in corporate minutes; accrue the expense in your accounting system), you can deduct them in 2014 provided that payment is made by March 15, 2015. This rule applies only to bonuses given to rank-and-file employees. In the case of bonuses to C corporation owner-employees (who own more than 50% of the corporation) and S corporation owner-employees (who have any ownership interest), the bonuses are deductible only when actually paid.

Bonus pools. Some companies budget a fixed amount for all employee bonuses and then allocate the funds according to performance or other measure. For an accrual basis employer to be able to deduct the bonus pool in 2014 even though funds are not paid out until 2015, the amount must be “fixed and determinable,” which means it cannot be changed by post-year-end events. Thus, setting aside a pool that will be distributed after the close of the year is deductible in 2014 as long as that pool is set by December 31.

But if the pool may be altered in any way after the close of the year, then it is not fixed and determinable, and is not deductible until actual payments are made. The IRS gives these examples of when a current deduction is not allowed:

Conclusion

Unless obligated by an employment agreement, you aren’t required to give year-end bonuses. But if you’ve had a good year, it’s a great gesture that will surely be appreciated. Be sure to discuss your plans with your tax advisor and clear things with your outside payroll company if you use one.

About the Author:

BarbaraWeltman
Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BigIdeas4SB or at www.BigIdeasforSmallBusiness.com

5 Ways to Build Trust in a Business

By Marco Carbajo, Guest Blogger
Published: December 9, 2014

The most valuable business commodity is trust. Richard Branson, author and founder of Virgin Group says, “Building trust in your brand isn't easy to achieve and it may take time, but it doesn't have to come at a high cost. With honesty, ambition, hard work and attention to detail you can instill a level of trust that will enable you to move forward.”

The fact is that integrity impacts all aspects of business and is among, if not the most important character trait for a company to have. It is the barometer by which your customers, lenders, potential business partners and employees evaluate you and your business. Trust in a business speaks volumes on how a company services and communicates with its customers.

A trustworthy business can be defined many different ways depending upon the person, business, or organization reviewing it. Here are five ways you can build trust in your business:

1. Deliver on your promises – Doing what you say you are going to do when you say you’re going to do it is crucial to building trust. Famous entrepreneur and motivational speaker Jim Rohn said, “One customer well taken care of could be more valuable than $10,000 worth of advertising.”

2. Have a solid reputation – Potential customers and business partners will search for information about you and your business online. According to a survey conducted by Dimensional Research, 90 percent of respondents who recalled reading online reviews claimed that positive online reviews influenced buying decisions, while 86 percent said buying decisions were influenced by negative online reviews. It’s crucial to manage your online reputation and establish an active social media presence, website and blog.

3. Communicate effectively – Effective communication is the cornerstone of any successful company. In today’s fast paced business world, having a range of communication channels available such as phone, e-mail, instant messaging, fax, etc. is key to maximizing your ability to communicate effectively with customers.

4. Stay in compliance - Staying up to date and compliant with all federal state, and local rules required to keep your business in good standing where it conducts business is essential. Failure to meet the necessary requirements can cost you loss of good standing, not to mention fines, penalties, reinstatement costs and even business closure.

5. Creditworthiness - Lenders, potential business partners and investors will check your company’s credit reports. With positive business credit reports and ratings with a credit agency such as Dun and Bradstreet, a creditor can assess how your company handles its financial obligations. “All of this can be done by taking the initiative. Increased credit affords businesses better relationships with partners, vendors, trade sources and the community at large” says Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp.

Let this be a guide for you in building and maintaining trust in your business. Integrity and credibility are invaluable business commodities. Take the time to study the habits and behaviors of those businesses who have gained trust in the business world. Adopt or adapt those that you can authentically incorporate into your own behavior. With time and consistency, you can build up trust and credibility for your business in the marketplace.

About the Author:

Marco Carbajo
Marco Carbajo

Guest Blogger

Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in 'Fox Small Business','American Express Small Business', 'Business Week', 'The Washington Post', 'The New York Times', 'The San Francisco Tribune',‘Alltop’, and ‘Entrepreneur Connect’.

How and When to Grow Your Small Business

By bridgetwpollack, Guest Blogger
Published: December 4, 2014

So, your fantastic business idea has launched, you’ve seen some success and you’ve finally hit an operational groove. Then things hit a bit of a plateau. You wonder, is it time to grow? If so, how? This month we’ve compiled resources to help you answer exactly those two questions and get your business on the path to achieving even bigger and better things.

Take stock of your business

Is now the right time to focus your business on growth? Before you can prepare your company for additional growth, take a moment to analyze your strengths and weaknesses. Taking these steps will help you concentrate your efforts in the areas where you have the best chance of success. By looking for strengths you will also spot your company’s weaknesses. Consult this 7-Step Checklist for Growing Your Business and see if your business is in healthy standing with items like costs, personnel, market and competition in order to plan for growth. Then download the 7 Steps for Growing Your Business to get growing!

Think inside-out

Have you met an entrepreneur whose business just seems to thrive no matter what else is changing in the world around them? Tap into that secret potion for success by reframing the way you think.  Daniel Kehrer, Founder & Managing Director of BizBest Media Corp., says, “Solid, long-term growth starts with what I call ‘inside-out’ thinking – doing the things inside your business that you can control, and paying less attention to the outside things you can’t control.” He shares his “10 Inside-Out Secrets of Growing Your Business” including:

  • Change how you think about growth - “Consider growth a constant – not something you switch on or off depending on conditions.”
  • Hire help to watch your money - “Find well qualified people who share your vision and then step back and take their advice. “ 
  • Recognize when to change direction - “There are times you may need to change direction or call it day, and having the courage to do so can be liberating.”

Learn from today's hottest tech companies

Meredith Wood, Editor-in-Chief at Fundera, shares insights into the growth strategies of companies like Uber, Dropbox and Google and how you can employ these techniques to take your business to new heights. Tips include offering free products and services, creating exclusivity and building word of mouth directly into your product. Don’t reinvent the wheel; learn How Your Small Business Can Steal Growth Strategies from 3 of Today's Hottest Tech Companies.

Still seeking inspiration for how to grow? Register for the upcoming SCORE LIVE Webinar on Tuesday 12/16: 5 Easy Things You Can Do in the New Year to Grow Your Business

About the Author:

bridgetwpollack
Bridget Weston Pollack

Guest Blogger

Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association. She is responsible for all branding, marketing, PR, and communication efforts. She focuses on implementing marketing plans and strategies to facilitate the growth of SCORE’s mentoring and trainings services. She collaborates with SCORE volunteers and develops SCORE’s online marketing strategy.

Real Sales Forecasts Have Curves

By Tim Berry, Guest Blogger
Published: November 23, 2014

Are you forecasting sales of a startup or a new product? Avoid straight lines. They aren’t realistic. Projections that draw good-looking curves are better than straight lines. That’s because sales are the result of human behavior, and human behavior is a natural phenomenon. Natural phenomena come much more often in sweeping curves than in straight lines. Look at the spiral of a snail’s shell, or the curve of a giraffe’s neck.

That’s true in nature and also in business and commerce. Business phenomena—sales, users, growth and such ­– are natural phenomena. Cycles sweep up and curve over in big S curves or bell curves, graceful waves­ ­– not straight lines.

Last week I reviewed two different business plans that got this wrong. It really cut into credibility. Put nice curves into your sales forecast and it will also look more realistic. 

Specifically, make a line chart of your projections. Put the value (dollars or units) on the vertical, and the months or years on the horizontal. What I want to see is an S-curve like this one:

image of s-curve

I’m not suggesting that there is some magic reason that the S-curve is more likely to be realistic. The S-curve is not better for any mathematical reason, nor for anything they teach in business schools. It just ends up more likely reflecting the natural course of events. In one case, it’s the way web traffic ramps up naturally. In another, it’s the way physical product is accepted by a distributor and stocked on retail shelves. Maybe sales growth happens in this pattern because it is the product of a variety of natural phenomena. It has to do with practical problems, acceptance, convincing people and so on. People, and the decisions they make, are also a natural phenomenon.

For further evidence, consider the classic bell curve of normal distribution that comes up so often in statistics. Or the standard technology adoption lifecycle, which shows a ramp-up as a curve flattening at the top and then curving back downward.

The first of the two forecasts I complain about looked like the chart here below when plotted on a line.

image of the straight line

Sales started at zero, in this forecast, and jumped to $4.3 million in the first month. Then they went flat, remaining at $4.3 million per month for the rest of the first year.

I think the problem with that is obvious. It is completely unrealistic. Regardless of the product, the channel, and the market (the plan was confidential so I’m not specifying here), sales won’t jump to maximum in one month and then stick there. Sure, if you use your imagination, you can come up with a story that might match the chart above. But for any normal context, any normal reader of the business plan, this looks bad. This startup team doesn’t understand sales.

The second of the two unconvincing sales forecasts, from a second business plan, looked like this one:

image of straight line

 

There two, the straight line doesn’t look realistic to me. Real-life phenomena don’t happen like that.

There are mathematical functions and sophisticated equations that can draw a typical S-curve. That, however, is not what I use, and not what I look for. I do a lot of forecasts and my favorite technique is to use software – a spreadsheet or forecasting software – that lets me estimate numbers interactively with viewing the line chart that shows me the shape. And of course I’ll use educated guessing plus a review of the specifics to calculate – well no, draw, not calculate – how fast the sales increase.

Forecasts are no good unless they are credible. And curves are more credible than straight lines.   

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .

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