Like benefit packages, bonus pay can be used as an important tool in keeping and attracting the best staff. A competitive bonus pay structure can increase productivity and keep staff engaged.
You need to ensure you pay any bonuses you promise your staff. If you don’t adhere, you could be taken to an employment tribunal. The amount of tax on a bonus needs to be paid correctly, or you could end up with financial fines.
In this article we will explain how bonus pay works, bonus pay tax rates, and how to calculate bonus pay for your employees.
What is bonus pay?
Bonus pay is a sum of money paid to an employee in addition to their salary. This is typically paid monthly, quarterly, or annually.
Do employees work harder for higher pay?
Offering a bonus can increase productivity. Financial incentives are a way of improving employee morale, especially around holidays.
How does bonus pay work?
Bonuses are usually performance-based, but can be based on company profits. Your details of your bonus structure should be laid out in the employee handbook or employment contract.
As an employer, you should report any bonuses you pay on a T4 bonus pay slip. More information on this can be found on the Canadian Government website. You should use your T4 pay slip to report the following:
- Taxable benefits.
- Wage deductions.
- Vacation pay.
Is a bonus part of your salary?
Bonuses are separate to salary. When advertising for a role, you should advertise the basic salary with any On-Target Earnings (OTE) separately.
If you advertise bonuses as part of the basic salary, employees could feel misled and you could be taken to an employment tribunal.
Are bonuses taxable?
Yes, any bonuses you pay your staff are taxable. In Canada, employers are required to deduct Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums and income tax (federal and provincial) from bonuses. Along with other any additional amounts paid to employees.
When you’re producing your T4 pay slip, you need to clearly state the amount of tax deducted on bonus pay that you are paying for your employees.
If you deduct incorrectly, you can be fined 10% of amount not disclosed. As per (Canadian Government), this is raised to 20% if second offence in a calendar year.
How much tax do you pay on a bonus?
The bonus tax rate is the same as the rate for their standard monthly salary.
Federal tax rates for 2021:
- 15% on the first $49,020 of taxable income.
- 20.5% on the next $49,020 of taxable income.
- 26% on the next $53,939 of taxable income.
- 29% on the next $64,533 of taxable income.
- 33% of taxable income over $216,511.
Provincial tax rates for 2021:
- $45,142 5.05%
- $45,145 9.15%
- $59,713 11.16%
- $70,000 12.16%
- $220,000 13.16%
- $131,220 10%
- Next $26,244 12%
- Next $52,488 13%
- Next $104,976 14%
- Over $314,928 15%
- $42,184 5.06%
- $42,185 7.7%
- Next $12,497 10.5%
- Next $20,757 12.29%
- Next $41,860 14.7%
- Next $62,937 16.8%
How to gross up a bonus
A gross up is an additional amount of money added to the bonus to cover income tax owed by the recipient.
There are three simple steps to follow when grossing up an employees’ bonus. Remember, percentages must be converted into decimals.
- Add up all federal an provincial tax rates.
- Subtract the total tax rates from the number one (one – tax = net percent)
- Divide the net payment by the net percent (net payment \ net percent = gross payment)
Get help with pay and benefits today with BrightHR
It’s important that you get your bonus pay correct and paid on time and as promised. Bonus pay is important to an employee and any issues with payment could land you in legal trouble.
BrightHR can help you streamline your bonus pay process. Our payroll navigator allows you to manage your bonus pay in seconds.