Accrued Bonuses and Year-End Payroll Timing
Your team earned their bonuses this year, but the money may not reach their bank accounts until January or later. That gap between earning and paying is where accrued bonuses live. Getting the timing right affects your profit for the year, your tax deductions, your employees' tax and your cash. This explainer walks you through how accrued bonuses work, what changes depending on the payday you choose, and a simple schedule to keep it all straight.
Key takeaways
- An accrued bonus is a bonus your business owes for work done this year but has not paid yet. On accrual books it is recorded as an expense and a liability at year end.
- Payroll taxes and employee income tax generally follow the date a bonus is actually paid, not the year it was earned.
- When your business can deduct an accrued bonus depends on your accounting method, who receives it and how soon after year end it is paid. Check current rules with an accountant.
- Clear written bonus terms and a simple accrual schedule make year end calmer for you and for your team.
Bonuses feel simple from the outside: someone does great work, you reward them. Behind the scenes, though, a bonus touches three different calendars. There is the year the work was done, the date the bonus is paid through payroll, and the tax year in which your business claims the cost. When those three line up neatly, nobody notices. When they do not, you can end up with a profit figure that looks wrong, a deduction in the wrong year or an employee surprised by their tax.
The good news is that a little planning in December sorts most of this out. You decide what you owe, record it properly and pick a payday that suits your cash and your team.
This article is general information about bookkeeping and payroll timing, not tax, legal or employment advice. Rules vary by country, state and business structure, so confirm your plans with a qualified accountant or payroll professional.
What makes a bonus "accrued"
Under accrual accounting, you record expenses in the period they relate to, not when the cash leaves your account. A bonus earned for this year's results belongs to this year, even if you pay it in January. So at year end, you record the expected bonus as an expense and set up a matching liability, often called "accrued bonuses" or "accrued wages", on your balance sheet.
When you should record it
In general terms, an accrual makes sense when two things are true at year end:
- You have an obligation. The bonus is promised in a contract or written plan, or you have clearly committed to it and employees reasonably expect it.
- You can estimate the amount. You know the formula or have decided the figures, even if final approval or exact numbers come a little later.
A purely discretionary bonus that you have not decided on or communicated by year end is different. It may belong to the year you decide on it. This is a judgment call worth discussing with your accountant.
Cash basis businesses
If you keep your books on a cash basis, you generally record the bonus when you pay it. Many sole traders and small partnerships work this way. You can still keep an accrual schedule for planning, so you know how much cash is spoken for in January, even if it does not appear in your accounts until then.
Common mistake
Promising bonuses verbally in a December team meeting without writing anything down. Vague promises create disputes later and make it harder to support an accrual. Put the criteria, amounts or formula, and payment date in writing, even in a short email to each person.
How payroll timing changes the picture
Once you know what you owe, the next question is when to pay it. The payday you choose matters for several reasons.
Employee taxes follow the payment date
In both the US and the UK, payroll taxes and income tax withholding are generally based on when wages are actually paid. A bonus paid on 30 December usually counts in this year's payroll totals. The same bonus paid on 7 January usually counts in next year's. That changes which year appears on the employee's tax forms. In the US, W-2s for the year are due to employees and the IRS by 31 January, so a late December bonus has to be captured correctly in those forms.
Some employees may prefer one timing over another for their own tax reasons. You can let people know the planned date in advance, but avoid giving them personal tax advice. Suggest they check with their own adviser.
Your deduction may follow different rules
For the business, the timing of the tax deduction can differ from the timing of the accounting expense. In general terms, cash basis businesses deduct bonuses when paid. Accrual basis businesses may be able to deduct a bonus in the year it was earned if it is fixed by year end and paid within a limited period afterwards, but special rules can apply to owners, shareholders and related parties. In the US, bonuses to owners of pass-through businesses and S-corp shareholders are often treated differently; S-corp owners must also pay themselves reasonable compensation through payroll. The UK has its own rules on when accrued pay is deductible. Because these conditions are detailed and change over time, ask your accountant before relying on any deduction timing.
Cash flow and the January squeeze
January can be a heavy month for cash. Depending on where you operate, it may bring estimated tax payments, annual software renewals and quieter sales. In the US, the Q4 estimated tax payment for 2027 is due 18 January 2028, and in the UK Self Assessment balancing payments are due 31 January. A bonus payday that lands in the middle of all that can strain your bank balance. Look at your cash forecast before setting the date.
Pro tip
Run bonuses as a separate payroll or a clearly labeled line in a regular run, and tell your payroll provider early. Year-end processing windows close quickly, especially around bank holidays, and a bonus added at the last minute is where errors creep in.
Recording an accrued bonus step by step
Here is a straightforward process most small businesses can follow in their bookkeeping software.
- Confirm the bonus terms. Gather the written plan, offer letters or emails that set out who gets a bonus and how it is calculated.
- Calculate the gross amounts. Work out each person's bonus based on the year's results. Use your best estimate if final figures depend on numbers not yet closed.
- Add employer costs. Include the employer share of payroll taxes or National Insurance and any pension or retirement contributions that apply to bonuses under your plan.
- Post a year-end journal entry. Record the total as an expense (for example "Bonus expense") and as a liability (for example "Accrued bonuses") dated the last day of the year.
- Pay through payroll. When the bonus is paid, run it through payroll with the correct withholding. The payment clears the liability rather than creating a new expense.
- Check for differences. If the final amount differs from the estimate, adjust the difference in the period you find it and note why.
A simple bonus accrual schedule template
Keep this schedule alongside your year-end file. One row per employee or group. All amounts are made-up examples.
| Employee or group | Basis for bonus | Gross bonus (example) | Employer costs (example) | Total accrued (example) | Planned pay date | Status |
|---|---|---|---|---|---|---|
| Store manager | Written plan, sales target met | $3,000 | $300 | $3,300 | 14 January | Approved |
| Sales team (3 people) | Commission true-up | $4,500 | $450 | $4,950 | 14 January | Final figures pending |
| Part-time staff | Holiday season thank-you | $1,200 | $120 | $1,320 | 23 December | Paid in December |
The last row shows why the "Status" column matters. A bonus already paid in December does not need an accrual at all; it is simply a December payroll expense.
Hypothetical example
Imagine Marcus, who owns a small design agency that keeps accrual books and has a calendar year end. His written bonus plan promises each designer a bonus if the agency hits its annual revenue target. It does. On 31 December, his bookkeeper records $9,000 of bonus expense plus estimated employer costs as an accrued liability. Marcus pays the bonuses through payroll on 14 January, after client payments have come in. The agency's profit for the year reflects the cost of the year's work, the designers see the bonus on next year's payroll records, and Marcus's accountant confirms whether the deduction can be claimed for the year just ended. All figures are made up for illustration.
Talking to your team about timing
People care a great deal about when money arrives, especially around the holidays. Being clear early prevents disappointment.
- Share the pay date in advance. If the bonus will arrive in January, say so in early December rather than letting people assume it comes before the holidays.
- Explain gross and net. Bonuses are taxed, and withholding on a one-off payment can look different from regular pay. A short note helps avoid surprise.
- Be consistent. Use the same timing each year where you can, so it becomes a known part of your pay calendar.
- Keep criteria visible. If bonuses depend on targets, share progress during the year so the final amounts are no surprise.
Employment rules on bonuses, including whether a bonus can be withheld if someone leaves before the pay date, vary by country and depend on your contracts. Check your terms and local law before deciding how to handle leavers.
Your year-end bonus timing checklist
- Confirm which bonuses are promised in writing for this year
- Calculate gross bonuses and employer costs
- Decide pay dates using your January cash forecast
- Tell your payroll provider before year-end deadlines
- Post the accrual journal entry on the last day of the year
- Ask your accountant about deduction timing, especially for owners
- Tell employees the pay date and explain that bonuses are taxed
- Reconcile the accrual once bonuses are paid
Frequently asked questions
Can I accrue a bonus for myself as the owner?
It depends on your business structure. Sole proprietors and partners usually take draws, not salary bonuses, so there is nothing to accrue through payroll. Owners of companies may be paid bonuses, but special deduction timing rules often apply. Ask your accountant before recording one.
What if I am not sure of the final bonus amounts by year end?
Record your best reasonable estimate based on the formula and the figures available. When the final amounts are known, adjust the difference and keep a note explaining the change.
Is a holiday gift card for staff treated like a bonus?
Often, yes. Cash and cash-like gifts such as gift cards are usually treated as taxable pay in the US and UK. Check the current rules and run them through payroll where required.
Related reading
The bottom line
Accrued bonuses connect this year's work with next year's payday. Put bonus terms in writing, calculate what you owe, record the accrual at year end if you keep accrual books, and choose a pay date that suits both your cash and your team. Payroll taxes follow the payment date, while your deduction timing depends on rules your accountant can confirm.
Spend a short session on it before the year closes. A tidy accrual schedule today means a smoother January payroll and far fewer questions at tax time.
