My firm gives us our bonus in the form of traveler’s checks. It’s a weird way of doing it, IMO, but I’m guessing that there’s some sort of tax advantage to doing it this way. Is it true?
It causes some problems. A lot of people nowadays are unfamiliar with how traveler’s checks work. In the days before omnipresent ATM’s and debit/credit cards, it was a good way to bring cash with you while traveling. You had to do it right, though: sign them immediately upon receipt, and then sign them again when you cashed them in. Our HR person is young and has never used them; she signed them once herself and then distributed them. The banks won’t take them, as they have to be countersigned again by the original signer. It made me realize how things have changed in how we access money while traveling nowadays.
It does seem a strange way to distribute a bonus. A better way would have been some kind of gift card. I don’t see how there could be tax advantages, because they are the equivalent of cash.
And, since the HR person signed them, you need to take them back to HR, and get the firm to get fresh travellers cheques, or some other form of cash, to give you the bonus.
I think at some point the company must have gotten some tax advice like, make sure your employees cash the checks in this fiscal year, not next fiscal year, and so they came up with the whack-a-doodle travelers check thing. Because when you buy a travelers check, you pay for it immediately. Giles, it’s likely that they came up with this idea in the old days before there were gift cards (remember American Express Gift Cheques?); also, in some states, gift cards can lose value if not used within a certain period of time.
I am really not a tax professional (or even a tax amateur, for that matter), but my suspicion is it does have something to do with recognizing the outgo in the current year versus next year.
I’m a tax lawyer, but I don’t deal with the intricate details of payroll issues (or other such mundanities holds nose high). I reallly don’t think there’s any tax advantage to paying by traveler’s check. Specifically on the timing point, the company should be able to deduct the compensation when the check is cut no matter when it’s cashed because (among other reasons) the employees are in constructive receipt of the cash (i.e., they can get the cash at any time by cashing the check). More generally, the tax consequences for all parties should generally be the same whether the bonus is paid by cash, a check, a traveler’s check, a prepaid VISA card, gift certificates to the local mall, twinkies (unless the company makes twinkies, in which case other rules come into play), or free car washes from the gas station down the street.
My WAG is that the company uses a third-party payroll provider that charges what the company believes to be too much for bonus checks, and some yahoo in the company’s accounting department cut a deal with a bank for low-cost traveler’s checks.
This would be my guess. I am aware of a large company that had to reform its expense policy because of managers providing stealth tax-free bonuses in a similar fashion. It was done with good intentions–some people are just not aware of accounting and the law.
FWIW, my previous employer used to provide lots of bonuses in the form of free product; after Sarbanes-Oxley, the system had to be changed completely and we wound up essentially paying payroll tax on the wholesale value of the product. I was thinking at the time that it probably wasn’t one of the intended consequences of the law, but we didn’t have any recourse.
I had to handle it with kid gloves, as it is a gift and in these economic times one doesn’t want to piss off HR.
I had accidentally signed it at the second place, so I had to take it back up to HR girl and have her line out my signature and add her own. I took it back down to the bank downstairs, and it still wasn’t right: HR girl should have also initialed it. So I brought it back upstairs and she initialed it, but was pissed. She said the bank downstairs was wrong and why wasn’t I taking it to a different bank that she recommended? I didn’t want to hike two blocks in high heels and 50 degree weather to that bank so I stood my ground and had her initial it. Three trips up and down the elevator and I finally got the check cashed. The bank also had me fingerprint the damn thing.
