With Higher Taxes Looming, Bonuses May Come Early - NYTimes ...

Some highly paid workers may be getting an extra Christmas present this year: an early bonus.

Firms in bonus-heavy industries like finance, law and consulting typically pay their annual bonuses after Jan. 1, once the firm?s (and employee?s) previous calendar-year performance can be fully assessed. But now, anticipating higher income tax rates in 2013, some companies have decided to distribute their bonuses by Dec. 31 instead.

At Ares Management, a financial services firm, employees have been told they will receive bonuses in mid-December instead of mid-January. A spokesman for the company declined to comment about its compensation practices.

Paying bonuses early ? not more, not less, just early ? can save high-income employees quite a bit of cash. That is because a series of tax changes scheduled to kick in at the end of the year will cause income received in 2013 to be taxed at higher rates than income received in 2012.

?It?s one of the few things you can do as an employer that?ll make employees happy that doesn?t cost you anything,? said Alan Johnson, managing director of Johnson Associates, a compensation consulting firm.

Mr. Johnson, like other compensation and tax consultants and lawyers interviewed, said he had been receiving a lot of inquiries from firms considering accelerating their bonuses into this year.

?Right after the election, many of our clients started calling saying they were interested in doing this,? said Regina Olshan, a partner in the executive compensation group at the international law firm Skadden, Arps, Slate, Meagher & Flom. So far only a handful have actually decided to give bonuses early, she said, but others may follow suit if Congress marches toward Dec. 31 without voting to undo planned tax increases.

?I can promise you I?ll have calls on Dec. 20 asking, ?Can I accelerate everything in the next two weeks??? she said.

Smaller, privately held firms ? particularly private equity companies, known for their tax-planning acumen ? seem to be taking the biggest interest.

Publicly held companies often have a bigger administrative and legal burden if they change their bonus calendar, especially since many of them have employees abroad under different countries? tax systems. Public companies also appear to be wary of the appearance of lowering their tax bill, even if the actions are completely legal, particularly if they received taxpayer-funded bailouts during the financial crisis.

?There?s so much contemplated regulation in terms of compensation these days,? said Steven G. Eckhaus, a partner at the law firm Katten Muchin Rosenman. ?You can just imagine the public reaction given the fact that bankers are still doing relatively well relative to everyone else. Most people don?t have the luxury of being able to change when they get their compensation, let alone receive that kind of bonus in the first place.?

One of the risks of paying bonuses early is that companies do not know for certain whether they will hit their annual targets, which for accounting, legal and administrative reasons are often supposed to be tied to the bonuses they pay out.

After all, in the last few weeks of the year, clients may not pay, the market may drop precipitously, or some other calamity may arise, and companies have no easy way of clawing back bonuses they have already given out.

At publicly traded companies, if performance-based bonuses are distributed and the company does not hit its targets, the company itself can face adverse tax consequences.

One solution, said Mr. Johnson, is to pay part of the annual bonus before Dec. 31, and then wait to pay the rest of it until after the new year, when the company has had a chance to go over the complete books more thoroughly.

Paying bonuses early can certainly impose administrative headaches.

Even though, for accounting reasons, companies usually know by December roughly how much money they?re going to pay out over all, they usually have not yet determined how that bonus pool will be distributed. At bigger firms, the process for allocating bonuses takes about six weeks, according to James F. Reda, managing director at James F. Reda & Associates, a division of Gallagher Benefit Services.

Usually, accountants and tax lawyers advise their clients to defer as much compensation as possible until after the new year.

That?s partly because there is a chance that their income will fall into a lower tax bracket the following year. Additionally, receiving income on Jan. 1 rather than Dec. 31 also means that they can hold on to their money longer before having to hand over some of it as taxes to the government. Income received on Dec. 31, 2012, is taxed by April 15, 2013; taxes on money received on Jan. 1, 2013, may not be payable in full until April 15, 2014. The taxpayer can use that extra year to invest the money and earn a return on it.

Accountants? and lawyers? advice is different this year because tax rates are expected to rise on Jan. 1, particularly for those with higher incomes.

If tax rates for high earners return to their Clinton-era rates, as President Obama wants, the top marginal income tax rate would rise from 35 percent to 39.6 percent. That may not sound like a big jump, but when you?re talking about large sums of money, the increase can be substantial.

A $1 million bonus taxed at the top marginal rate, for example, would incur an additional $46,000 in taxes ($396,000, instead of $350,000).

And that calculation factors in just one of the tax rates scheduled to rise at the end of the year. Earners in the top brackets are likely be hit with other tax increases in 2013, including the expiration of the payroll tax cut and a new Medicare surtax created by the Affordable Care Act.

Clients have been calling their tax and compensation lawyers about accelerating other forms of income, too. Ms. Olshan said she received a call from a client who expected to be fired next year and wanted to know about requesting severance early.

Compensation lawyers and consultants noted that companies have received ?false alarms? about Washington?s plans to raise taxes in the past, so companies may be dragging their feet about speeding up the bonus cycle this year.

?This is about the fourth time we?ve gone through this tax scare, where people say there?s some catastrophic tax thing coming,? Mr. Johnson said. As a result, he thinks most firms will not revise their bonus calendars. ?Some may regret it deeply in a few months, but I think most won?t get around to it.?

Source: http://economix.blogs.nytimes.com/2012/11/29/with-higher-taxes-looming-bonuses-may-come-early/

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