PREVENT BONUS TAX SHOCK
MANY employees look forward to their annual bonus, only to be disappointed when a large portion is deducted for tax.
Employees can pay extra tax on a monthly basis towards the tax that would be deducted from their annual bonus, so that no tax is deducted when they receive their annual bonus.
An amount is included in an employee’s monthly tax calculation to compensate for the tax on the bonus.
This way, the employee effectively pays their “bonus tax” month on month to get a full bonus pay-out. Employees can request this option from employers.
One of the main reasons for companies failing to offer this option to staff is because they are unsure of how it works or how the monthly tax deductions should be calculated.
This has led to employees being unaware of the option for provision for tax on bonuses and thereby being hit with a large tax deduction on their annual bonus.
Different companies have different approaches on how they make provision for the tax on bonuses for their employees and that process depends on the payroll vendor or software that is used.
Leading solutions providers offer very straightforward options to automate this calculation.
The provision for tax on bonus is calculated over the tax year and not the calendar year. Employees should be encouraged to request this at the beginning of every tax year.
Employees should request it for the next tax year should they want to spread out their tax deductions throughout the year to get their full pay-out of their bonus. executive committee member of the SA Payroll Association