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March 20, 2009



He got a PhD from Brown and you think he's stupid? C'mon..

Charlie (Colorado)

Boy, Tom, that's a new one on me too, but my brother is a big-time tax guy, I'll check with him.


I don't know about the corporate tax liabilities of bonuses vs. base salary. I can tell you that Stock Options are a thing of the past. SEC and FASB rule changes have made granting options pretty much a thing of the past.

Stock options were great because the reward is worthless if the company losses value - and the potential upside is great if the firm grows.

Black Hat

Isn't there a limitation on the deductability of compensation above $1MM unless it is performance based?


I do some corporate tax work as an attorney and I am not aware of any diference in the tax treatment of bonuses as opposed to salary. Correct me if I'm wrong, but I also think its likely that AIG has huge losses for tax purposes and that the deduction for bonuses will just add to their Net Operating Loss. They might have the ability to carry it back and get a refund for taxes paid in prior years, but I suspect that they could already do this without the extra $165 Million in deductions.


Every bonus I ever got was shoehorned into the payroll system as a regular paycheck. But those were on a different scale than these bonuses, so maybe that doesn't apply. I do think that the reason that finance industry bonuses come out in February is so that the employees can rely on withholding and have plenty of time to make any quarterlies so that they can avoid penalties for underpayments.

But I'm pretty sure it's regular income -- with FICA tax, medicare tax, federal and state unemployment tax being paid on it, just like regular income.


I just noticed from our host's earlier post that AIG had a $55 Billion loss in 2008 so the real world tax benefit to AIG of paying the bonuses was zilch.


I'm pretty sure it's regular income -- with FICA tax, medicare tax, federal and state unemployment tax being paid on it, just like regular income.



The only benefit to a bonus payment over regualar compensation is that an employer can accrue it and deduct it in one year, and not pay it until the next tax year (provided it is paid before March 15, in the case of calenday year employer). That "benefit" isn't going to help out AIG --- which is certainly going to be in a loss position for years.

The 1 million rule applies only to the three top executives of a company -- it would not apply to the folks receiving a retention bonus. (That bonus, in any event, would not meet the definition of "perfomance based")

In other words, Josh Marshall is misinformed. Since bonuses are withheld at a higher rate than regular comp, the Fed actually gets an immediate cash benefit from cpmensation being paid as a bonus as opposed to salary.


I think he's confusing bonuses with the Subchapter S corp dividends which are not subject to Medicare taxes. See <http://online.wsj.com/article/SB120528180300228815.html?mod=djemEditorialPage> "Many high-earning individuals evade the Medicare payroll tax by setting up "S Corporations," paying themselves in untaxed dividends rather than taxable wages. John Edwards avoided $590,000 in Medicare taxes this way in the 1990s."


the base salaries dwarf everyone elses base salaries as well.

Lord Whorfin

Cash is cash, and taxable in the calendar year paid. No FICA tax after reaching the limit, but medicare tax keeps on accruing.
FUTA and SUTA stop, usually after 7,000 (FUTA) or 8,000 (VT SUTA)

CPA since 1998

Lord Whorfin

Bonuses are not automatically withheld at a higher rate. The taxpayer can choose to have ZERO withheld, if he/she wants. Of course, you then pay the penalty on April 15th for not withholding enough, if you owe more than 1000 in tax.

Fresh Air

What an idiot! Bonuses are paid as an incentive to get deals done. As an added feature, paying a big bonus in January amounts to a one-month loan from employees, but more importantly it tends to reduce employee defections while deals are in process.

This spills over into sales and trading, where they are paid as an incentive to generate revenue. The tax code has ZIPPO to do with it. Typical lefty "journalist." No experience, no facts, no logic, just his own preconceived, half-baked ideas.

hit and run

http://news.yahoo.com/s/ap/20090320/ap_on_bi_ge/mortgage_giants_bonuses>Barney Frank now saying that Fannie and Freddie should be stopped from paying out their retention bonuses.


Thanks,LW. Nice to have you around.


It appears that these employees worked on a guaranteed annual salary as opposed to an annual income divided by 12 monthly payments. After the perfomed their work they have earned their payments whether paid monthly or annually. Their tax liability and their right to keep what they have earned should be the same. Unlike UAW members who change their contract for expected future unearned income AIG employees are asked to give up earned income.


What the left blogs mean to say is: if you accept a bonus, you have to admit your guilt.

Or I can try this one: Barney Frank doesn't want Fannie/Freddie to get bonuses so they won't testify against him.

Charlie (Colorado)

In other words, Josh Marshall is misinformed.

I'm stunned.

Fresh Air

Lord Whorfin--

In every investment bank where I worked, bonuses were automatically withheld at 40 percent--the highest marginal rate at the time. I never heard of anyone changing the withholding rate, though I suppose it's technically possible someone could request it.


Very helpful, thanks.


LW --

That's the default, and in my experience, the majority will go with the default position.


One motivatation that companies have for paying bonuses is flexibility. Bonuses can be easily reduced in future years, as opposed to salaries.

Fresh Air


It's really reduction in the current year. If a securities firm wants to reduce salaries it fires a lot of people.


Please! Look at who we're talking about. A little thing like not knowing what the farc they're talking about hasn't ever stopped them from jabbering.


Bonuses are not automatically withheld at a higher rate. The taxpayer can choose to have ZERO withheld, if he/she wants. Of course, you then pay the penalty on April 15th for not withholding enough, if you owe more than 1000 in tax.

Uh, that's not true. The IRS has special rules for withholdings on bonuses. They are indeed subject to higher witholding rates than payroll. Here's the IRS link: http://www.irs.gov/publications/p15/ar02.html#en_US_publink100011649

Here's a site that explains it in a little friendlier terms.

T J Sawyer

IRS allows a taxpayer to request additional withholding. Can't be decreased. Otherwise it is currently a flat 25% - obviously insufficient for those big hitters we are discussing. In my experience, the top guys always request additional withholding based on their accountants recommendations.

Retired CFO



A company at which I used to work had a $10,000,000,000 annual payroll. Almost all the payroll was in salary.

You know the securities industry better than I do, but let's assume that 67% of compensation is bonus rather than salary.

If you assume that salary accrues evenly, you could look at the expense as either a 100% Year One hit on June 30 for a salary-based company versus a 33% June 30 Year One and a 67% March 15 Year Two expense for a bonus-based company.

I know cost of capital for these companies these days is only, say, 2% (what credit crisis?). By my calculations, that 8.5 month deferral of $6.7 billion saves some 95 million in capital costs.*

From a tax point of view, accrued expenses can be deducted in the current year if they are paid out within 2.5 months of the end of the current year. So, assuming you have any profits on which to pay tax, you get a tax deduction of $6.7 billion in Year One for money you pay out in Year Two. Ceteris paribus,** you've gotten at least a 2.5 month interest-free loan of $2.3 billion.*** At your given 2% cost of capital, that's another $10 [$33] million .

I've seen companies use higher internal charges for use of capital. At a 20% rate that $105 [$128] million becomes 1 Billion dollars*(IV) [$1.28 billion].

That may be chump change in some circles, but it would be a significant portion of earnings at a surprisingly large number of companies.

*$10 billion * .67 * .02 * (March 15-June 30=8.5 months)/12

** They never are. It's somewhat more complicated than this. For one thing, you can deduct the accrued bonus against estimated tax payments otherwise payable during the year, so you end up with something closer to an average 8.5 month deferral rather than only 2.5 months.

*** $10 billion * .67 * .35 tax rate * .02 = $47 million. $47 million * 2.5 / 12 = $9.8 million [$47 million * 8.5 / 12 = $33 million].

*(IV) Picture this said dramatically, with the use of a pinky finger for emphasis.


chump change

I should have just said that if this is penny ante in TM's world, I am glad that I have never gone over to his house for poker night.

Tom Maguire

I'm not saying $10 million is chump change, but as the young lady said to Eliot Spitzer, big compared to what? It's still less than 1% of the underlying payroll - surely that would not be anywhere near enough to drive a preference for bonuses over salary relative to more obvious reasons, like pay for performance (or,as with AIG lately, attendance).

Lord Whorfin

I disagree- you can also change your withholdings to lower the amount taken. How would the IRS know the difference between bonus and wage? It is all reported on the W-2. Their focus is on total withholdings versus total annual wages. (this does not apply to the employer!)

Lord Whorfin


Such dividends are taxable to the recipient, and they are not deductible as a business expense, while salaries and bonuses are. You also have to own most of the company (self employed) for this to work. This is an advantage, as long as the difference between top corporate rate (39%) and top personal rate (35%) exists, and the primary reason to use the S-Corporation rules.

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