For those fortunate enough to receive bonus payments as part of your remuneration, you’ll understand the frustration of seeing one amount on your letter of bonus, but a dwindled amount reflecting in your bank account on payment.
We receive hundreds of queries from people with regards to what percentage tax they’ll have to pay on a bonus they’ll be receiving, either annually or as an adhoc performance bonus. Much like other variable incomes, such as commission, there’s a misconception that tax on a bonus payment is withheld at a higher rate.
The fact is that there’s no special ‘bonus tax rate’. It doesn’t have its own rate of tax.
Your bonus amount simply becomes part of your total taxable income for the year, which may impact your tax bracket, i.e. the percentage of tax you pay on your income. The amount of tax withheld in your bonus month depends on which method your company uses to calculates tax. We can demonstrate the difference by using an example.
Thandi is a 40-year-old fashion buyer who works for a successful retail clothing brand. She earns R20,000 as a basic salary each month but in March 2016 she received an annual performance bonus of R10,000.
Before we jump into the two tax calculation methods, let’s establish Thandi’s typical rate of tax on her basic salary of R20,000.
Annual taxable income R20,000 x 12
If we refer to the 2016/2017 tax rate tables, Thandi needs to pay tax at a rate of R33,840 + 26% of taxable income above R188,000. As a 40-year-old, she’s eligible for the primary rebate of R13,500, so once we’ve established her tax payable for the year, we can deduct this amount to get to her actual tax due.
Ready for some sums? Let’s get to it.
Annual tax payable = R33,840 + [26% x (R240,000 – R188,000)]
= R33,840 + [26% x R52,000]
= R33,840 + R13,520
Next we deduct the primary rebate of R13,500.
R47,360 – R13,500
If we divide this amount by 12, we’ll see the monthly tax amount Thandi pays on her basic salary.
Monthly Tax = R33,860 / 12
By the way, there’s no need for you to remember all these formulas! You can simply use our Income Tax Calculator to work it out for you.
Now that we understand what her tax obligation is without the bonus, let’s have a look at the two methods companies generally use to calculate tax on bonus payments.
In this method, your total income for the month, i.e. your basic salary plus your bonus amount, is annualised – or multiplied by 12 – to determine the annual taxable amount.
In our example, Thandi received a bonus of R10,000 in March 2016. This pushed her total monthly income (together with her usual salary of R20,000) to R30,000. If we multiply this by 12, her assumed annual taxable income is R360,000.
Using our Income Tax Calculator, we know that the annual tax amount on R360,000 is R68,380.
This means that in March 2016, Thandi paid R5,698.33 (R68,380 / 12) tax on her payment of salary and bonus.
The downfall of this method is that the calculation assumes that you’ll be receiving the higher income for every month of the tax year, which is obviously not the case.
The good news is that when it comes to tax filing season and you complete your annual return, you’re quite likely to have been overtaxed and therefore due a refund from SARS (provided you’re fully tax compliant, of course).
The other method, called balance of remuneration, provides a more accurate view of income and therefore a more precise tax amount.
In this method, you first calculate the tax for the year when no bonus is involved, and then you determine the tax for the year with the bonus amount added. The difference between the two becomes the tax payable on the bonus component of her income, and must be added to the ‘normal’ tax amount.
Remember that Thandi’s annual income without her bonus was R240,000, giving a tax amount of R33,860.
If we now add her bonus amount (R10,000) to the annual income (R240,000), her new annual income becomes R250,000. Our Income Tax Calculator tells us that the annual tax due on this amount is R36,460.
Therefore, the difference is:
R36,460 – R33,860
Thandi’s total tax for March 2016 will then be:
Usual tax + tax on bonus amount
= R2,821.67 + R2,600.00
You’ll notice this method gives a lower tax amount (i.e. R5,698.33 - R5,421.67 = R276.66) than the annualisation method does, meaning that Thandi’s tax being withheld is closer to her eventual tax liability.
While our example doesn’t show a dramatic discrepancy, you can imagine in a situation where the bonus amount is substantially more than usual pay that the annualisation method would inflate the annual taxable income considerably, and as a result, the tax payable too.
Irrespective of which method your payroll uses to determine tax on any bonus amount you receive, you should always file a tax return with SARS to claim back any overpaid tax.