The journal entry for an accrued bonus is a debit to Bonus Expense and a credit to Accrued Bonus Liability for the gross amount owed to employees. A second entry debits Payroll Tax Expense and credits Payroll Taxes Payable for the employer’s share of taxes on that bonus. Together, those two entries put the full cost of the bonus into the period the employees earned it, even though the cash goes out later.
The Core Accrual Entry
Say your company approves a $10,000 year-end bonus pool. The entry is straightforward:
| Account | Debit | Credit |
|---|---|---|
| Bonus Expense | $10,000 | |
| Accrued Bonus Liability | $10,000 |
The debit increases compensation expense on the income statement and reduces net income for the period. The credit sets up a current liability on the balance sheet for the gross amount owed, before any withholdings. Employees will eventually receive less than $10,000 in cash, but the liability at accrual is the full gross figure. Withholdings for income tax and the employee’s FICA share only enter the picture when you cut the check.
For the entry to be appropriate under GAAP, the obligation has to be probable and the amount reasonably estimable. A formula-driven bonus, like 5% of net profit or a set amount per unit sold, clears both hurdles once the period’s numbers are in. A discretionary pool can also qualify once management has approved it or communicated the award to employees before the books close. What matters is that you’ve committed to pay, not that the money has moved.
Accruing the Employer’s Payroll Tax Cost
The bonus expense by itself understates what the bonus costs the company. Employers owe their own share of payroll taxes on every dollar of bonus compensation, and that cost belongs in the same period.
The employer’s FICA rate is 6.2% for Social Security plus 1.45% for Medicare, for a combined 7.65%.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates On a $10,000 bonus, that’s $765. One cap to watch: the Social Security portion only applies to wages up to $184,500 in 2026.2Social Security Administration. Contribution and Benefit Base If an employee has already crossed that threshold earlier in the year, the 6.2% doesn’t apply to the bonus and the employer’s cost drops to the Medicare 1.45%. Medicare has no cap.
Federal unemployment tax runs 6.0% on the first $7,000 of wages per employee per year, with most employers getting a 5.4% credit that brings the effective rate to 0.6%.3Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return State unemployment tax rates and wage bases vary widely.4Employment & Training Administration. Unemployment Insurance Tax Topic In practice, most year-end bonuses go to employees who are already past both wage bases, so FUTA and SUTA often don’t apply to the bonus at all.
Assume the $10,000 pool goes to employees whose wages are still below the Social Security cap and above the unemployment wage bases, and you estimate total employer tax at $800:
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | $800 | |
| Payroll Taxes Payable | $800 |
The two entries together show that a $10,000 bonus really costs the company $10,800 once the employer taxes are included.
Recording the Payment
When the bonus is actually paid, you clear the liability you already booked. The gross amount doesn’t match the check because you’re now withholding on the employee’s behalf.
Bonuses are supplemental wages. For federal income tax withholding, you can apply a flat 22% rate on supplemental wages up to $1 million per employee per year; the rate jumps to 37% above that.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide The employee owes their own 7.65% FICA share.6Social Security Administration. FICA and SECA Tax Rates Employees earning over $200,000 in the calendar year are also subject to an additional 0.9% Medicare tax on wages above that mark; the employer does not match it.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Using the $10,000 bonus with $2,200 federal withholding at the flat rate, $765 employee FICA, and $285 state income tax withheld:
| Account | Debit | Credit |
|---|---|---|
| Accrued Bonus Liability | $10,000 | |
| Federal Withholding Tax Payable | $2,200 | |
| State Withholding Tax Payable | $285 | |
| FICA Taxes Payable (Employee Share) | $765 | |
| Cash | $6,750 |
The debit to Accrued Bonus Liability removes the obligation from the balance sheet. The credits to the payable accounts create fresh short-term liabilities because those withholdings are owed to the taxing authorities; you’ll clear them when you make the deposits. Cash reflects the net check.
Adjusting When the Estimate Changes
Accruals are estimates, and the final number rarely matches. If the approved bonus turns out to be $10,500 against a $10,000 accrual, you debit Bonus Expense for $500 and credit Accrued Bonus Liability for $500 to true up the liability before payment. If the actual bonus lands at $9,200 instead, you go the other way: debit Accrued Bonus Liability for $800 and credit Bonus Expense for $800. Either correction flows through the income statement in the period you discover the difference.
Reversing Entries as a Shortcut
Some accountants use reversing entries as a matter of workflow. On the first day of the new period, you flip the original accrual: debit Accrued Bonus Liability and credit Bonus Expense for the full amount. That temporarily creates a negative expense balance and zeros the liability.
When payroll runs the bonus later, it can be recorded as an ordinary debit to Bonus Expense with the usual withholding credits and a credit to Cash, without any reference to the prior accrual. Because the reversal already sits in the expense account as a negative, the payroll entry nets to the correct expense for the period. Reversing entries aren’t required and don’t change reported numbers. They just keep the payroll team from having to split the payment between the old accrual and current-period expense, which cuts the risk of double-counting.
The 2.5-Month Rule for Deducting the Bonus
Booking the accrual doesn’t automatically get you the tax deduction in that year. For accrual-method employers, a bonus accrued at year-end is deductible in the accrual year only if it’s actually paid within 2½ months after the end of the tax year.8eCFR. 26 CFR 1.404(b)-1T – Method or Arrangement of Contributions For a calendar-year company, that’s March 15.
Miss the window and the bonus is treated as deferred compensation under IRC §404(a)(5). The deduction shifts to the tax year the employee includes it in income, which is generally the year they receive the money.9Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer A $50,000 pool paid March 16 instead of March 15 pushes the whole deduction into the next tax year.
The rule addresses only tax deductibility. The GAAP accrual still belongs in the period the employees earned the bonus, so a late payment creates a book-tax timing difference you track separately.
For accrual-method employers, IRS Revenue Ruling 2011-29 also lets a board or committee resolution before year-end fix bonuses for a group of employees even if individual amounts aren’t yet assigned, provided the all-events test is otherwise met and any forfeitures revert to the pool.10Internal Revenue Service. Revenue Ruling 2011-29
Related-Party Bonuses Work Differently
If the person getting the bonus is a related party, the normal accrual deduction rules don’t apply. Under IRC §267(a)(2), an accrual-method taxpayer can’t deduct a payment to a related person until the recipient includes it in gross income.11Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers The most common related parties in a bonus context:
- An individual and a corporation where the individual owns more than 50% of the outstanding stock.
- Family members: spouses, siblings, ancestors, and lineal descendants of the owner.
- Two corporations, or an S-corp and a C-corp, where the same people own more than 50% of each.
This hits small businesses often. If you’re the sole owner of your S-corp and accrue a $20,000 bonus to yourself on December 31, the deduction doesn’t attach until you actually receive the bonus and include it in your personal income. The GAAP accrual entry is the same as for any other employee. The tax treatment is what changes, creating another book-tax timing difference.
Non-Discretionary Bonuses and Overtime
Whether a bonus is discretionary or non-discretionary also affects the amount you accrue, because non-discretionary bonuses can drag additional overtime pay along with them.
Under the FLSA, a bonus is non-discretionary when the employer sets goals or criteria in advance that trigger the payout. Attendance bonuses, production bonuses, and profit-sharing bonuses tied to pre-announced targets all qualify. A truly discretionary bonus is one where both the decision to pay and the amount stay within the employer’s control, with no prior promise creating an expectation.12eCFR. 29 CFR 778.211 – Discretionary Bonuses
Non-discretionary bonuses must be included in a nonexempt employee’s regular rate of pay for overtime purposes. If the bonus covers multiple workweeks, you apportion it back across those weeks and recalculate the overtime premium for each week the employee worked more than 40 hours.13eCFR. 29 CFR 778.209 – Method of Inclusion of Bonus in Regular Rate The added overtime is compensation expense that belongs in the accrual alongside the bonus. Leave it out and both your expense and your liability for the period will be understated.
Structuring the bonus as a percentage of the employee’s total straight-time and overtime earnings over the period avoids the retroactive recalculation, because the overtime premium is built into the payout by design.