Smart Bonus Strategies

Some tips and advice on how and when business owners should give themselves bonuses.

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Personal Portfolio

When and how to give yourself that extra paycheck

It's almost the end of the year. Have you paid yourself a bonus? Often, time- and cash-strapped business owners don't think about their bonuses until the last minute. Unfortunately, that approach can leave you paying yourself too little or owing too much to the tax man. With planning, you can increase your self-compensation without hurting your business. But because owners' bonuses are fraught with tricky tax issues, keep in mind "The Tax Basics of Bonuses" (below), as well as the following guidelines:

BE FLEXIBLE. Most entrepreneurial ventures go through periods when they can support owner bonuses and periods when they simply can't. It's best not to become too accustomed to either phase. As CEO of Giordano Art Ltd., an art-licensing company based in Little Neck, N.Y., George Valentino makes bonus decisions for himself and his partner each year. "Some years, those bonuses have been very attractive," he confides, although the partners skipped them entirely during the early years. Recently, the company cut back on bonuses again, but not because of a cash-flow crunch. The partners' children have entered the business, bringing big growth plans that require investment.

DON'T PROCRASTINATE. Forget the tradition of annual bonuses. There's also a lot to be said for smaller, more frequent financial boosts. Richard Colombik, a lawyer and certified public accountant based in Schaumburg, Ill., is convinced that the only hope most entrepreneurs have of paying themselves adequate bonuses is to consider the issue each month. "What I've seen, again and again, is the business owner who says, 'I'll pay myself a bonus if there's anything left at the end of the year,'" observes Colombik. "Then, if the company has extra cash, the owner replaces some office furniture or buys a new computer." Colombik's suggestion: Each month, pay all expenses and set aside a reserve to deal with next month's bills. Then give yourself a bonus. (If yours is an S corporation, read "The Tax Basics of Bonuses" before trying this strategy.)

STICK TO CASH ON HAND. Say you're counting on collecting some large accounts receivable in January. What if you boost your corporate-credit-card charges to pay yourself a bonus in December and delay paying your bills until next year? Don't try it. "That's one way to wind up in trouble with the IRS," warns Michael Cascio, an accountant with Ramusevic & Cascio, a CPA firm in Elmhurst, N.Y. "If you paid yourself a bonus, and the funds weren't readily available in a bank account or other liquid assets, the IRS could decide it was a sham transaction." The result? "You could wind up paying tax penalties and facing some unpleasant business consequences as well," he notes.

The Tax Basics of Bonuses

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