Executive Bonus Plan

The executive bonus plan (also called a Section 162 plan) allows employers to pay reasonable compensation to employees for services performed. The employer is free to give bonuses to employees for whatever reason. Since they are a business expense, the employer then receives an income tax deduction for the bonuses.

With respect to insurance, the employer pays premiums on the insurance and reports the payment to the IRS as income to the employee. The employee then has to pay the taxes on the bonus as if the money was received directly. Most often, individuals using an executive bonus plan also control the company, hence the plan’s name.