Page 68 - Small Business Taxes

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Generally, reasonable pay is the amount that a • It is awarded as part of a meaningful pre- You may not owe employment taxes on
similar business would pay for the same or simi- sentation. TIP the value of some achievement awards
lar services. • It is awarded under conditions and circum- you provide to an employee. See Pub.
To determine if pay is reasonable, also con- stances that don't create a significant likeli- 15-B.
sider the following items and any other pertinent hood of disguised pay.
facts. Tangible personal property. An award
• The duties performed by the employee. isn't an item of tangible personal property if it is Bonuses
• The volume of business handled. an award of cash, cash equivalents, gift cards,
• The character and amount of responsibil- You can generally deduct a bonus paid to an
ity. gift coupons, or gift certificates (other than ar- employee if you intended the bonus as addi-
• The complexities of your business. rangements granting only the right to select and tional pay for services, not as a gift, and the
receive tangible personal property from a limi-
• The amount of time required. ted assortment of items preselected or preap- services were performed. However, the total
• The cost of living in the locality. proved by you). Also, tangible personal prop- bonuses, salaries, and other pay must be rea-
• The ability and achievements of the indi- erty doesn't include vacations, meals, lodging, sonable for the services performed. If the bonus
vidual employee performing the service. is paid in property, see Property, later.
• The pay compared with the gross and net tickets to theater or sporting events, stocks,
bonds, other securities, and other similar items.
income of the business, as well as with dis- Gifts of nominal value. If, to promote em-
tributions to shareholders if the business is Length-of-service award. An award will ployee goodwill, you distribute merchandise of
a corporation. qualify as a length-of-service award only if ei- nominal value or other de minimis items to your
• Your policy regarding pay for all your em- ther of the following applies. employees at holidays, you can deduct the cost
ployees. • The employee receives the award after of these items as a nonwage business ex-
• The history of pay for each employee. their first 5 years of employment. pense. See Pub. 15-B for additional information
• The employee didn't receive another on de minimis fringe benefits. If you provide
Compensation in excess of $1 million. Pub- length-of-service award (other than one of food to your employees, your business deduc-
licly held corporations can't deduct compensa- very small value) during the same year or tion may be limited; see Meals and lodging,
tion to a “covered employee” to the extent that in any of the prior 4 years. later.
the compensation for the tax year exceeds $1
million. For more information, including the defi- Safety achievement award. An award for Education Expenses
nition of a “covered employee,” see the Instruc- safety achievement will qualify as an achieve-
tions for Form 1125-E and Regulations section ment award unless one of the following applies. If you pay or reimburse education expenses for
1.162-33. 1. It is given to a manager, administrator, an employee, you can deduct the payments if
clerical employee, or other professional they are part of a qualified educational assis-
Test 2—For Services employee. tance program. Deduct them on the “Employee
Performed 2. During the tax year, more than 10% of benefit programs” or other appropriate line of
your employees, excluding those listed in your tax return. For information on educational
You must be able to prove the payment was (1), have already received a safety ach- assistance programs, see Educational Assis-
tance in section 2 of Pub. 15-B.
made for services actually performed. ievement award (other than one of very
small value). Section 2206 of the CARES Act ex-
Employee-shareholder salaries. If a corpo- Deduction limit. Your deduction for the TIP pands the definition of educational as-
ration pays an employee who is also a share- cost of employee achievement awards given to sistance to include certain employer
holder a salary that is unreasonably high con- any one employee during the tax year is limited payments of student loans paid after March 27,
sidering the services actually performed, the to the following. 2020. The exclusion applies to the payment by
excessive part of the salary may be treated as a an employer, whether paid to the employee or
constructive dividend to the employee-share- • $400 for awards that aren't qualified plan to a lender, of principal or interest on any quali-
awards.
holder. The excessive part of the salary fied education loan incurred by the employee
wouldn't be allowed as a salary deduction by • $1,600 for all awards, whether or not quali- for the education of the employee. Qualified ed-
fied plan awards.
the corporation. For more information on corpo- ucation loans are defined in chapter 10 of Pub.
rate distributions to shareholders, see Pub. 542. A qualified plan award is an achievement 970. This exclusion expires January 1, 2026,
award given as part of an established written unless extended by future legislation.
Kinds of Pay plan or program that doesn't favor highly com-
pensated employees as to eligibility or benefits.
A highly compensated employee is an em- Fringe Benefits
Some of the ways you may provide pay to your ployee who meets either of the following tests.
employees in addition to regular wages or salar- 1. The employee was a 5% owner at any A fringe benefit is a form of pay for the perform-
ies are discussed next. For specialized and de- time during the year or the preceding year. ance of services. You can generally deduct the
tailed information on employees' pay and the cost of fringe benefits.
employment tax treatment of employees' pay, 2. The employee received more than You may be able to exclude all or part of the
see Pubs. 15, 15-A, and 15-B. $130,000 in pay for the preceding year. value of some fringe benefits from your employ-
You can choose to ignore test (2) if the em- ees' pay. You also may not owe employment
Awards ployee wasn't also in the top 20% of employees taxes on the value of the fringe benefits. See
when ranked by pay for the preceding year. Table 2-1 in Pub. 15-B for details.
An award isn't a qualified plan award if the
You can generally deduct amounts you pay to average cost of all the employee achievement Generally, no deduction is allowed for activi-
your employees as awards, whether paid in awards given during the tax year (that would be ties generally considered entertainment,
cash or property. If you give property to an em- qualified plan awards except for this limit) is amusement, or recreation, or for a facility used
ployee as an employee achievement award, more than $400. To figure this average cost, ig- in connection with such activity. However, you
your deduction may be limited.
nore awards of nominal value. may deduct these expenses if the goods, serv-
Achievement awards. An achievement award Deduct achievement awards, up to the max- ices, or facilities are treated as compensation to
the recipient and reported on Form W-2 for an
is an item of tangible personal property that imum amounts listed earlier, as a nonwage employee or on Form 1099-NEC for an inde-
meets all the following requirements. business expense on your return or business pendent contractor. If the recipient is an officer,
• It is given to an employee for length of schedule. director, beneficial owner (directly or indirectly),
service or safety achievement. or other “specified individual” (as defined in

Chapter 2 Employees' Pay Page 9