Explain how a bonus arrangement can be used to defer the taxes paid by an employee.

Question

Quizplus · Accepted Answer

The Answer is The ability to use a bonus arrangement to defer tax on employment income is based on the fact that, while business income is accrual based, employment income is on a cash basis. This means that the business can deduct the bonus at the time a commitment is made to make the payment, but the employee will not be taxed on it until it is received. If the bonus is declared in one year and paid in the following year, this provides a one year deferral to the employee. Note, however, the bonus must be paid within 180 days of the year end of the employer. If it is not paid within this period, the employer will not be able to deduct the bonus until it is paid.

Explain How a Bonus Arrangement Can Be Used to Defer