Is salary expense treated differently than bonuses by IRS?

Question

I own my own company (C-corp), am the sole employee and draw a salary every quarter. I've done well this first six months and was think of taking a bonus. Is salary treated the same as bonus in terms of payroll taxes that must be paid? Is it better to declare a dividend instead?

Answer 1

You could possibly declare a dividend from your C-Corp, but some of that would depend on if the IRS would see your current salary as "reasonable". Now, the dividend won't reduce your taxable income within the corporation, but you will only be taxed on it at a maximum 15% on your personal return. As far as taxation of the bonus within a C-Corp, it's basically just like any other salary you would take (assuming you aren't accruing the bonus into the next tax year). It would be deducted as part of "officer compensation" on page 1 of your Form 1120. Also, technically speaking, there should be a meeting of the board of directors to allow you to take that bonus (I know, pretty goofy, but the IRS may ask to see the board minutes if you ever get audited).

The main thing you have to worry about as a corporate officer is the "reasonable compensation" issue. The IRS really climbs all over that one. What's reasonable? Well, that's the big unanswered question. There isn't a guidebook anywhere that's going to tell you that, but a nice little chat with your accountant should help you along.

Answer 2

I cannot speak to the advantages of declaring a dividend - but yes, you must withhold taxes on all bonuses paid to employees.