Why smaller businesses and start-ups should consider bonuses this year-end

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Did you know that it can be more tax-effective to pay end of financial year bonuses to business owners than retain earnings in the business? It is also an ideal time to consider paying bonuses to your team, as bonuses are tax-deductible to your business and act as an excellent performance reward for your employees.

Here are some helpful hints if you are considering paying bonuses at financial year end.

Firstly, ensure your bookkeeping is up-to-date and your bank accounts are reconciled. Update the fixed asset register, transfer assets to pool, and run depreciation for the full year. Compare your financials to the prior year and recode any transactions where necessary. Ensure your payroll records are correct. Once your books are up-to-date and you are confident that the numbers are accurate, review your net profit position. Do you have excess profit that amongst other things could be paid out as bonuses?

Be aware that bonuses attract superannuation guarantee contribution, so remember to include this when assessing net profit for excess.

The next step is to check your cashflow. Just because you have excess profit in the books, doesn’t mean you’re going to have excess cash. It is important to consider whether the business has the cash available to distribute bonuses. The idea is to implement tax-saving strategies within the boundaries of what the business can manage.

If you have available cash and you’ve decided to pay bonuses to team members, these must be performance-based for best results since bonuses are designed to be incentives and need to be much more than a tax saver. Therefore, now is a good time to conduct performance reviews, rather than just paying a year-end bonus across the team. Team member bonuses will be valued higher if your team knows their hard work has been recognised and you value their contribution to the business.

When it comes to paying bonuses to business owners, they need to be distributed in line with their personal tax position. This is because it may or may not be more tax effective for the business owner to receive a bonus over retaining excess profit in the business.

Tax planning is essential. Not only in the lead up to financial year-end, but throughout the year as well. It may sound like a lot of work, however, the more you practice tax planning, the more dedicated you will become to saving yourself real money. Preparing an annual tax plan will help you plan for the new financial year ahead, and keep those hard-earned dollars in your bank accounts!