Bonuses

Bonuses should follow the same general guidelines used for salary with respect to compensation for C corporation owners. However, it's a wise policy to avoid paying yourself a large, last minute bonus at the end of the year. The timing is often as important as the amount when it comes to raising red flags for a tax auditor.

Bonuses in a C corporation should be performance based, with parameters established and documented in writing in advance. If the objectives are set in advance, the chances of a charge of excess compensation will be greatly reduced and the deductibility of the bonus assured.

On the other hand, if your business is organized as a sole proprietorship, partnership, LLC, or S corporation, it's not a bad idea to take a small owner's draw during the year, and then pay yourself a year-end bonus after you know how profitable your operation was that year. Regardless of the timing, all the profits will be taxable to the owners.