An accrued bonus journal entry debits Bonus Expense and credits Accrued Bonus Liability for the gross amount owed, with a companion entry debiting Payroll Tax Expense and crediting Payroll Taxes Payable for the employer’s share of taxes on that bonus. Together, the two entries put the full compensation cost into the period employees earned the bonus, even though the cash leaves the account later.
The Core Entry
Suppose your company approves a $10,000 year-end bonus pool. The entry is:
| 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 creates a current liability for the gross amount owed to employees, before any withholdings. Income tax and the employee’s FICA share come out of that gross figure later, when payroll actually cuts the check.
When the Accrual Is Appropriate
The matching principle puts the expense in the same period as the revenue it helped produce. A bonus employees earned through 2026 work is a 2026 expense regardless of the pay date. Most companies book these during the quarter-end or year-end close.
Under GAAP, two conditions have to be met: the obligation is probable, and the amount is reasonably estimable. A contractual bonus tied to a formula, like 5% of net profit or a flat amount per unit sold, clears both as soon as you have the period’s financial data. Discretionary bonuses can also qualify if management has approved a pool or communicated the award to employees before the period closes. The question is whether you’ve committed to paying, not whether the money has moved.
Accruing the Employer’s Payroll Taxes
The bonus expense by itself doesn’t capture what the bonus actually costs. Every dollar of bonus compensation triggers employer-side payroll taxes that belong in the same period.
FICA is 6.2% for Social Security and 1.45% for Medicare, a combined 7.65%.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates On a $10,000 bonus, that’s $765. The Social Security portion applies only to wages up to $184,500 in 2026, so if an employee has already crossed that threshold earlier in the year, only the 1.45% Medicare tax applies to the bonus.2Social Security Administration. Contribution and Benefit Base Medicare has no cap.
Federal unemployment (FUTA) is 6.0% on the first $7,000 of wages per employee per year, usually reduced to an effective 0.6% after the state unemployment credit.3Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return State unemployment wage bases vary.4Employment & Training Administration. Unemployment Insurance Tax Topic Year-end bonuses often go to employees who have already blown past both the federal and state unemployment bases, in which case FUTA and SUTA may not apply to the bonus at all.
Assume the $10,000 bonus goes to employees past the unemployment bases but still under the Social Security cap, and estimate total employer tax at $800. The entry is:
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | $800 | |
| Payroll Taxes Payable | $800 |
The true cost of a $10,000 bonus is $10,800 once you include the employer’s tax burden. Both entries together put the full compensation cost in the right period.
Recording the Payment Later
When payroll actually runs the bonus, you clear the liability you accrued and set up the withholdings you now owe to tax authorities.
Bonuses are supplemental wages. For federal income tax withholding, employers can apply a flat 22% rate on supplemental wages up to $1 million per employee in a calendar year, with 37% above that threshold.5Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide The employee also owes their own 7.65% FICA share.6Social Security Administration. FICA and SECA Tax Rates Employees past $200,000 in a calendar year owe an additional 0.9% Medicare tax on wages above that mark, and the employer does not match that surtax.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
A realistic breakdown for the $10,000 bonus: $2,200 federal income tax at the 22% flat rate, $765 for the employee’s FICA share, and $285 for state income tax. Withholdings total $3,250, net check $6,750.
| 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 clears the balance sheet obligation. The credits set up the new short-term liabilities you’ll settle when you deposit the withheld taxes with the IRS and state agencies. Cash reflects what actually left the bank.
When Your Estimate Was Off
Accruals are estimates and the final number rarely matches. Correct the difference before processing the payment.
If the approved bonus is $10,500 against a $10,000 accrual, debit Bonus Expense for $500 and credit Accrued Bonus Liability for $500 to bring the liability to the right amount. The payment entry then clears the full $10,500.
If the actual bonus comes in at $9,200 against a $10,000 accrual, reverse $800: debit Accrued Bonus Liability for $800 and credit Bonus Expense for $800. The correction hits the income statement in the period you catch it.
Reversing Entries
Some accountants reverse the original accrual on the first day of the new period as a procedural convenience. Debit Accrued Bonus Liability and credit Bonus Expense for the full accrued amount. The liability goes to zero, and the expense account carries a temporary negative balance.
When payroll runs the bonus later that month, the payment is recorded the simple way: debit Bonus Expense for the gross amount, credit the withholding payables and Cash. The negative expense balance from the reversal cancels the extra debit, so the period’s net expense comes out right. Reversing entries aren’t required and don’t change any reported numbers. They just keep the payroll team from having to split entries between the prior accrual and the current payment, which is where double-counting usually sneaks in.
The 2.5-Month Rule for the Tax Deduction
Accruing a bonus in December does not by itself guarantee a tax deduction that year. For accrual-method employers, the bonus is deductible in the accrual year only if it is 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). You can’t deduct it until the tax year the employee includes it in income, which is normally the year they receive it.9Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer A $50,000 pool paid on March 16 instead of March 15 shifts the entire deduction into the next tax year.
There’s also a separate test on the front end. A bonus is deductible in the accrual year only if the liability satisfies the all-events test: all events establishing the liability have occurred by year-end, and the amount is determinable with reasonable accuracy.10Internal Revenue Service. Revenue Ruling 2011-29 A board or compensation committee action before December 31 fixing bonuses for a group of employees satisfies the first part, even if individual allocations are not yet set.
The 2.5-month rule only governs the tax deduction. The GAAP accrual still belongs in the period employees earned the bonus. Track the resulting book-tax difference separately.
Related-Party Accruals Work Differently
If the recipient is a related party, the normal accrual deduction rules do not apply. Under IRC §267(a)(2), an accrual-method taxpayer cannot 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 common bonus-context relationships are:
- An individual and a corporation where the individual owns more than 50% of the outstanding stock.
- Family members including 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. A sole owner of an S-corp who accrues a $20,000 bonus to themselves on December 31 cannot deduct that bonus this tax year unless they actually receive it and include it in personal income the same year. The GAAP accrual entry is identical to any other employee’s. The split is purely on the tax side.
Non-Discretionary Bonuses Can Change the Amount You Accrue
Classification as discretionary or non-discretionary affects whether you owe additional overtime pay, which changes the amount you need to record in the first place.
Under the FLSA, a bonus is non-discretionary when the employer sets qualifying criteria in advance. Attendance bonuses, production bonuses, and profit-sharing bonuses tied to announced targets fall here. A truly discretionary bonus leaves both the decision to pay and the amount within the employer’s control until near the end of the period, with no prior promise creating an expectation.12eCFR. 29 CFR 778.211 – Discretionary Bonuses
Non-discretionary bonuses have to be folded into a nonexempt employee’s regular rate for overtime purposes. If the bonus covers multiple workweeks, apportion it 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 additional overtime belongs in the same accrual as the bonus. Skip it and you understate both the compensation expense and the payroll liability for the period.