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Override Bonus Tax

When paying a bonus to an employee you may notice that the bonus tax deduction is too high, and may potentially be overtaxed. When an employee is paid a bonus, the bonus tax calculation uses an estimate of their annual earnings to calculate tax rate for the bonus.

This estimate may be incorrect when:
  • The employee has recently received a larger than normal pay.

  • The employee did not receive income for part of the year.

To correct this, an override for the estimated annual earning can be used for bonus tax calculations. This override is enabled from the Employee Profile > Tax factors tab.

Override Annual Taxable Income

When using the bonus tax method the annual taxable income is calculated automatically. However, when the estimate is too high the bonus payment may be overtaxed.

To correct for this, an estimate of the annual taxable income (and expense) can be entered manually on the Employee Profile > Tax Factors tab for an employee receiving a bonus payment.

  1. Open the Employee Profile of the employee:

    1. Open Canadian Payroll > Employee Profile > Employee Profile.

    2. Select the employee from the Employee drop-down.

  2. Open the Tax Factors tab.

  3. Enable For Bonus Tax Use Estimated Annual Taxable Income.

  4. Enter the estimated annual Income and Expense for the employee.

    8 30 2018 1 55 51 PM
    Estimated annual earnings…

    Estimated annual earnings are calculated as Income - Expense.

Example

Now when the employee receives a bonus, the tax deduction is calculated using the marginal tax rate from the annual taxable earnings override.

With annual earnings override

Without entering estimated annual earnings the bonus tax amount of 366.00 is calculated. 

6 29 2018 12 01 35 PM

With annual earnings override

With estimated annual earnings entered on the Employee Profile, the bonus tax amount of 300.00 is calculated. 

6 29 2018 10 44 37 AM

J
Jack is the author of this solution article.

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