For salary expense to be deductible:

-The compensation must be ordinary and necessary,

- reasonable in amount,

- should be based on services rendered, and

- actually paid or incurred in the year for which the deduction is claimed (which is as shown by your payroll records).

The timing of your deduction depends on which method of accounting you use. In other words, the cash or accrual method of accounting.

If you use the cash method, you must deduct your expense for the salary, wage, or benefit payment in the year it's paid to the employee.

If you use the accrual method, you must deduct the expense when you commit your obligation to make the payment and when the services are performed, it doesn't matter that the actual paycheck is distributed later.

If, by any chance, the compensation is paid in some form other than cash, the deductible amount is computed by calculating the fair market value of the property transferred. For example, if you give your employees laptops at Christmas, the cost you paid for the gifts would be deductible.

The main question is that what is "reasonable" compensation?? It generally depends upon the facts and circumstances at the time the compensation is paid. Generally, the IRS does not challenge the amount of the compensation as unreasonable unless & until the employee has some control over the employer or has some personal relationship with the owners. Such examples include: if employee has a large stock ownership in the employer organization or he/she is related to the organization's key personnel.

So, to all the employees out there, before the tax sason 2012 comes, just pay attention to your employer employee relationships to determine that you qualify for deductible salary expense for employees.