You need to consider the tax implications before you pay your employees' bonuses
'Maria Ramos and members of her executive will not receive bonuses this year as they take responsibility for the bank's disappointing performance,' reports the Business Day. That's a great step to take to ensure that the bank improves its performance and live up to its shareholders' expectations. But your employees might not agree - after all if they've done a good job, they deserve to be rewarded. But there's more to paying employee bonuses than just deciding whether they should get one or not - you also need to consider the tax implications of your bonus payment method.
'It is a sad fact that bonuses often are the cause of more dissatisfaction than satisfaction, more dis-incentivisation than incentivisation,' says an article on Accountancy SA's website .
And one of the reasons for this is that tax eats so much of your employees' bonuses up. Sometimes, if the bonus isn't very big, it could even mean that your employee takes home less pay because their bonus pushes them into a higher tax bracket.
How you pay your employees' bonuses affects how much they'll be taxed
There are two choices you have when it comes to deciding how your employees' bonuses will be tax ed. Here they are, as outlined by the Practical Tax Loose Leaf Service :
Option 1: Tax payable in the month in which you receive your bonus
This is the most common type of bonus – in this case, you pay tax on your bonus when you receive it.
In this case, 'the bonus amount is added to the employee's remuneration for the applicable year, and taxed as an annual payment according to that year's statutory tax tables, unless the employee is not in standard employment, when the bonus is taxed at 25%,' explains Accountancy SA.
Option 2: Tax on your bonus is spread over the year
'You may elect to
spread the tax on your annual bonus over the full tax year. By choosing this option you don't exactly receive your annual bonus tax -free as some may think. All that you're doing is paying the tax on your bonus in instalments so that when your bonus is paid, you receive the gross bonus 'without' deductions', says tax specialist Andre van Staden in the Practical Tax Loose Leaf Service :
'How is the tax spread over the year?' you ask.
According to van Staden, 'the tax on the bonus must be calculated:
- At the beginning of the tax year, or
- When you commence employment, or
- As soon as you opt to use this scheme.'
The tax payable on the bonus is spread over the remainder of the tax periods in the specific tax year – in either 12 payments (if your employee receives a monthly salary) or in 52 installments (if your employee earns a weekly wage).
Note: Regardless of how you choose to pay your employees' bonuses. you need to ensure the full amount of tax on your bonus is paid by the end of the year of assessment. As long as you do that, it's up to you how you choose to pay employee bonuses.
For more information on the tax implications for employee bonuses get your hands on the Practical Tax Loose Leaf . In the Practical Tax Loose Leaf we've got a dedicated chapter on employee bonuses helping you to stay on the right side of SARS. In this chapter you'll discover:
- Are salary advances taxable?
- Did you know that you can decide how your bonus is taxed?
- Are loyalty programme benefits taxable?
- All you need to know about the taxation of retrenchment
- The employees' tax treatment of retirement annuities explained