WHAT IS §162 EXECUTIVE BONUS PLAN?
An executive bonus plan is a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice. When structured properly, it has the ability to provide advantages to both employers and employees. When used effectively, it can be a valuable tool to attract and retain key executives.
WHAT ARE §162 EXECUTIVE BONUS PLAN BENEFITS?
The benefits to the Executive usually include life insurance policy death & living benefits as well as cash value accumulations that can be used as a retirement income supplement. With an executive bonus plan, the business can use tax deductible company funds to selectively provide valued benefits to key people.
HOW DOES §162 EXECUTIVE BONUS PLAN WORK?
WHAT ARE TAX IMPLICATIONS?
The bonus is taxed as ordinary income to the executive at their normal income tax rate. In some situations, employers may gross-up the bonus so the executive has a zero net cost. Employers can recognize an income tax deduction for bonuses paid under the 162 Bonus Plan, provided that the payments (when combined with the employee’s other compensation) are reasonable and the employer is not directly or indirectly a beneficiary of the policy.
WHICH TYPE OF ENTITY CAN USE §162 EXECUTIVE BONUS PLAN?
C-Corporations, S-Corporations, and LLCs can use §162 executive bonus plan for employees. In terms of tax savings, C-Corporations would work better than S-Corporations or LLCs.
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