Performance-related or annual bonuses reward employees and encourage them to be more productive. Some employers may choose to offer an accrued bonus. Read on to learn about providing an accrued bonus, how to account for bonus accrual, and rules to follow.
What is an accrued bonus?
An accrued bonus is a bonus that is contingent on performance. An employer determines whether or not to offer an accrued bonus to an employee.
Accruing a bonus is a tough decision to make. You cannot predict an employee’s future performance. And if you offer an accrued bonus to an irresponsible employee, you may need to spend time reversing the accrual.
If you are unsure about offering bonus accrual, you may consider different bonus options. Or, you can temporarily accrue a smaller bonus payment. After the employee’s performance is substantial, you can increase the bonus payment amount going forward.
For example, you can start an employee off with a $100 bonus accrual each quarter. After the first quarter ends, you may consider increasing the bonus to $200.
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Bonus accrual accounting
Accurately record bonus accruals in your company ledger. To avoid inaccuracies in your financial statements, promptly record bonus accruals in your books. Erroneous books can result in inaccurate reporting and filings.
You can choose to accrue a flat rate or percentage for a bonus. For example, you may give an employee a flat bonus of $300 per quarter. Or, you can give employees a percentage of their wages, such as a 10% bonus every three months.
How frequently you issue the bonuses (e.g., monthly or quarterly) depends on your type of business. Account for any accrued bonuses regularly to avoid errors in your small business accounting books. If you issue a bonus, record the correct portion of the bonus each time you close your books.
To record an accrued bonus, debit your Bonus Expense and credit your Accrued Bonus Liability accounts. Check out the following template for an accrued bonus journal entry:
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| X/XX/XXXX | ||||
| Bonus Expense | Bonus Accrual | X | ||
| Accrued Bonus Liability | X |
Bonus accrual example
Say an employee receives a flat rate bonus payment of $500 for the quarter. Debit your Bonus Expense account $500 and credit $500 to your Accrued Bonus Liability account to record the bonus accrual.
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| 01/31/2019 | ||||
| Bonus Expense | Bonus Accrual | 500 | ||
| Accrued Bonus Liability | 500 |
Accrued bonus tax withholding
Accrued bonuses are subject to federal income tax, Social Security tax, and Medicare tax. You can withhold taxes using the IRS’s federal income tax withholding tables (e.g., standard withholding rates). Or, you can opt to withhold a supplemental flat tax rate of 22%.
Bonus accrual rules
You must understand bonus accrual rules. One rule to follow is the two and a half month rule.
Companies that accrue bonus expenses must pay out the bonus within two and a half months of the year-end. Bonuses not paid out during the two and a half month time-frame cannot be tax deductible. If you pay the bonuses during the two and a half month time frame, deduct the expense for the tax year.
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This article has been updated from its original publication date of February 19, 2019.
This is not intended as legal advice; for more information, please click here.
