While business owners are generally entitled to give themselves company bonuses, certain U.S. tax regulations govern this practice. There are ethical considerations between the owner and the company, as well. In the U.S., the Internal Revenue Service (IRS) is tasked with ensuring that a business owner’s compensation, including bonuses, is in proportion to the scale of the company, the nature and range of the owner’s involvement, and other factors.
Scale of Company
Bosses who own small businesses with modest earnings would likely become suspect by tax enforcers if they paid themselves an extravagant bonus that was out of proportion to the company’s profits. For example, if a boss takes a bonus using funds that weren’t part of the company’s liquid assets or otherwise available from a bank account, the company would likely be investigated and possibly face tax penalties.
Owner’s Involvement and Time Commitment
The value of a business owner’s bonus should be reflective of the owner’s dedication to and involvement with the company. A boss who owns and operates a company in name only without being involved in or aware of its day-to-day functions would likely be flagged for further investigation by tax enforcement agents if he took home a bonus.
The degree to which company owners who give themselves bonuses are integral to their own company’s success, whether through special skills, experience or persona, may also be evaluated by tax enforcement agents. For example, a business would be better able to justify giving its owner a large bonus if the business relies heavily on its owner to bring in investors through personal contacts, or if the owner heavily promotes the company and has become a public figure through these efforts.
When companies undergo a difficult financial period, bosses sometimes forfeit their bonuses as a sign of solidarity with employees who have been negatively impacted, perhaps by wage cuts, layoffs or increased overtime. If a boss were to give himself a bonus during a tough financial period, employee morale and, in turn, productivity could suffer, even if the bonus falls within legal tax parameters.