taxes on bonus pay

Bonus Pay: How to properly calculated the taxes

It’s quite common for your payroll service provider to have problems with this tax. We have experience a number of reputable companies that did not have the engine built to calculate Bonus payments properly. It is your responsibility to ensure the bonus calculations are accurate to the best of your abilities.

Result of incorrect taxing on bonuses:
– employee being unhappy when filing taxes. They end of paying more instead of getting a refund.
– employers responsible for paying the CPP and EI company portions
– employers responsible for paying the all the taxes for the bonus because the employee has left and you cannot recoup the amounts.
– CRA PIER audit can be triggered which cases more headaches
– possible further audits going years back if suspected of not handling bonuses properly which amounts to much more time and money spent

A general rule to understand: CRA considers these payments as being an increase to your pay rate. Taxes are calculated on your pay rates.

Another key note: This special tax calculation is also use for irregular payments like retro pay. Review these other payment types here.

Calculating CPP on Bonuses:
The difference in calculating CPP on bonuses than a regular payment is the CPP basic exemption. You do not take the basic exemption of $3500/year (as of 2018) in consideration. Therefore take the taxable amount of the bonus (Pensionable amount) by the CPP contribution rate (4.95% as of 2018). Also provide the employer matching amount.

If the employee is exempt or has reached his maximum contribution for the year, you can ignore calculating CPP.

Calculating EI on Bonuses:
Calculating EI is exactly the same. Multiply the EI rate by the taxable amount of the bonus (Insurable Earnings). Also provide the employer contribution amount.

If the employee is exempt of has reach his maximum for the year, you can ignore calculating EI.

Calculating Income Taxes on Bonuses:

Total taxable income is less or equal to $5000
If the total the taxable income and the bonus year to date is $5,000 or less use 15% tax (10% in Quebec) for the bonus payment.

Total taxable income is greater than $5000
There are 2 bonus tax methods listed (one-time bonus or more than one bonus), however understand the concept is the same. Whether is one bonus or 52 bonuses a year, you have to include all bonus amounts year-to-date when calculating the taxes.

The employee regularly gets $1500 salary per cheque. An now you’re paying the employee $1000 bonus.

Let’s say you are bi-weekly pay with 26 pay periods a year. Take the amount of the bonus divided by the number of periods in the year = $38.46 ($1000 / 26) This now is added to the regular salary amount = $1538.46.

Calculate the taxes on $1538.46 = $211.58 (assuming using claim code 1 with no pre-tax deductions, or taxable benefits in Ontario)

Calculate the taxes on the regular salary amount $1500 (you can refer to last pay run) = $204.38 (assuming using claim code 1 with no pre-tax deductions, or taxable benefits in Ontario)

Subtract the difference = $7.20 (211.58 – 204.38)

Annualize the taxes per year: $7.20 multiple by 26 pay period = $187.20

Regular Taxes = $204.38, Bonus Taxes = $187.20 Total Taxes Paid = $391.58

CRA provides good information here on how to calculate bonus taxes

Bill 17: Alberta Employment Standards Updates for January 2018

Bill 17 as known as The fair and family-friendly workplace act will come into effect January 1, 2018. Here is what you should know as an Alberta Employer:

Leave Eligibility
– Now employees are eligible for any leave after 90 days of employment. Prior law was 1 year.

New Leave types
– Death or disappearance of child leave
– Critical illness of child leave
– Long-term illness and injury leave
– Domestic violence leave
– Personal and family responsibility leave
– Bereavement leave updates
– Leave for citizenship ceremony
– For details around time off and whether paid or unpaid periods please review the Alberta Employment Standards Website.

– Employees must receive a 30 min break after 5 hours of work. This break can be paid or unpaid.
– If both the employer and employee agree, this can be taken in two 15 min break periods

Employees with Disabilities
– Permits are no longer valid that allow employees with disabilities to be paid less than minimum wages

– Banked overtime is now banked at the overtime rate of time and a half (1.5) instead of straight time
– Banked time can now be kept for 6 months instead of 3.

Holiday Pay
– No minimum requirement of 30 days worked prior to the holiday.
– Holiday pay is calculated at 5% of wages from the last 4 weeks.

Vacation taken
– Vacation can be taken in half days increments rather than a full day only

Alberta employers, HR professionals, union leaders and employee managers should become familiar with these changes that will have an impact immediately. These changes must be incorporated into your policies and union agreements if they do not already account for the minimum standards. Particularly, understanding the new leave types and the extended periods employees can be away for. In addition, its always a good idea to reach out to your HRIS and payroll service provider to see what plans they have to help you account for these legislative employee standard changes and how to use them.

For details of all changes please visit the employee standards website of Alberta here.