In a BLR webinar entitled ‘Incentive Pay: Best Practices for Designing and Managing Pay-for-Performance Plans’, Dan Kleinman discusses the tax consequences associated with incentives in organizations. He provides the following details regarding what companies need to know about taxes related to incentives:

• Bonuses paid in consideration for services rendered are almost always taxable wages subject to income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA)
• These include production, incentive, and non-deferred profit sharing bonuses
• Most states require that all forms of remuneration, including bonuses, be treated as wages when figuring the amount of gross payroll for unemployment compensation tax purposes
• Noncash gifts of limited value such as holiday turkeys, however, are excluded from income and employment tax coverage
• Incentive payments to employees are generally deductible by the employer as ordinary business expenses
• To qualify for the deduction, certain requirements must be satisfied
• Consult your tax expert or contact the nearest office of the IRS for information on the tax ramifications of your bonus plan

Dan Kleinman is the principal of Dan Kleinman Consulting (www.dankleinmanconsulting.com), a California-based compensation and human resource consulting firm. He has served as an independent consultant for a broad spectrum of regional, national, and international companies, providing compensation, performance, organizational planning, and reward-system design services. He can be reached at info@dankleinmanconsulting.com.