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previous page Previous Page: Publication 535 - Business Expenses - Not-for-Profit Activities
next page Next Page: Publication 535 - Business Expenses - Kinds of Pay
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p535-005.htm#en_us_publink1000130841

Chapter 2
Employees' Pay(p6)

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previous topic occurrence Employees' Pay next topic occurrence

taxmap/pubs/p535-005.htm#TXMP1693ac4eIntroduction

You can generally deduct the pay you give your employees for the services they perform. The pay may be in cash, property, or services. It may include wages, or salaries, or other compensation, such as vacation allowances, bonuses, commissions, and fringe benefits. For information about deducting employment taxes, see chapter 5.
Deposit
You can claim the following employment credits if you pay wages to individuals who meet certain requirements.
  • Work opportunity credit (claimed on Form 5884).
  • Credit for affected Midwestern disaster area employers (claimed on Form 5884-A).
  • Empowerment zone and renewal community employment credit (claimed on Form 8844).
  • Indian employment credit (claimed on Form 8845).
  • Welfare-to-work credit (claimed on Form 8861).
  • Credit for employer differential wage payments (claimed on Form 8932; only for payments made in 2009).
Reduce your deduction for employee wages by the amount of any employment credits you claim. For more information about these credits, see the form on which the credit is claimed.

taxmap/pubs/p535-005.htm#TXMP0da28c7d

Useful items

You may want to see:


Publication
 15 (Circular E), Employer's Tax Guide
 15-A Employer's Supplemental Tax Guide
 15-B Employer's Tax Guide to Fringe Benefits
 15-T New Wage Withholding and Advanced Earned Income Credit Payment Tables
See chapter 12 for information about getting publications and forms.
taxmap/pubs/p535-005.htm#en_us_publink1000154151

Tests for 
Deducting Pay(p6)


rule
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To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it. These and other requirements that apply to all business expenses are explained in chapter 1.
In addition, the pay must meet both of the following tests. The form or method of figuring the pay does not affect its deductibility. For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible.
taxmap/pubs/p535-005.htm#en_us_publink1000154152

Test 1—Reasonableness(p6)


rule
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Determine the reasonableness of pay by the facts and circumstances. Generally, reasonable pay is the amount that like enterprises pay for the same, or similar, services.
You must be able to prove that the pay is reasonable. Base this determination on the circumstances that exist when you contract for the services, not those that exist when the reasonableness is questioned. If the pay is excessive, the excess is disallowed.
taxmap/pubs/p535-005.htm#en_us_publink1000154153

Factors to consider.(p6)


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To determine if pay is reasonable, consider the following items and any other pertinent facts.
taxmap/pubs/p535-005.htm#en_us_publink1000154154

Test 2—For Services Performed(p6)


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You must be able to prove the payment was made for services actually performed.
taxmap/pubs/p535-005.htm#en_us_publink1000154155

Employee-shareholder salaries.(p6)


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If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive distribution to the employee-shareholder. For more information on corporate distributions to shareholders, see Publication 542, Corporations.
previous pagePrevious Page: Publication 535 - Business Expenses - Not-for-Profit Activities
next pageNext Page: Publication 535 - Business Expenses - Kinds of Pay
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication