If you have your own business in China, at some point in time, you may feel the need to hire local Chinese personnel. One-time annual bonus is the bonus that is distributed by employers to employees once annually based on annual business performance and the annual business performance.
TAX ON ONE-TIME ANNUAL BONUS
The one-time annual bonus is considered as a monthly salary for an additional month and the tax applied on it shall be paid by the tax withholding agent. In a fiscal tax year, this method of taxation can only be applied once for each taxpayer. If an employee is entitled to receive any additional bonus such as attendance award, overtime bonus, improvement award, it shall be combined with his/her salary income in the same month for payment of individual income tax in accordance with the tax laws.
METHODS OF CALCULATING TAX ON GROSS ONE-TIME ANNUAL BONUS
The annual one-time bonus obtained by a taxpayer shall be considered as a separate one-month salary with standard salary taxes applicable.
For example: The applicable tax rate for a RMB 120,000 bonus is 25 percent (RMB 120,000 ‘ 12 months = RMB 10,000).
Following are the methods of calculating tax on the gross one-time annual bonus:
1. By dividing 12 months the one-time annual bonus received by the employee in that specific month, and determining the applicable tax rate and the quick deduction as per the quotient.
- If that month’s salary is equal to or higher than the deductible income as stipulated by the government, then: taxes payable = one-time annual bonus x applicable tax rate – quick deductions.
- If that month’s salary is lower than the deductible income as stipulated by the government, then: taxes payable = (one-time annual bonus – the balance between that month’s salary and the deductible income) x applicable tax rate – quick deductions.
THE NET ONE-TIME ANNUAL BONUS
The net annual bonus can be converted into gross annual bonus and then be taxed accordingly.
- Dividing the net annual bonus by 12, apply the relevant applicable tax rate A and the quick deduction A.
- Gross annual bonus = (net annual bonus’quick deduction A) divided by (1-applicable tax rate A).
- Based on the result of dividing the gross annual bonus by 12, apply the relevant tax rate B and the quick deduction B.
- Taxes payable = gross annual bonus x applicable tax rate B ‘ quick deduction B.
ANNUAL BONUS TAX GAP INTERVALS SHARING: ONE YUAN EFFECT
If a company wants their employees to get more net income after income tax deduction, they should consult an HR service provider, who can guide them about calculating annual bonus with a lower tax rate to maximize the in-hand bonus of their employees, since the calculation method is complicated. To calculate the IIT for annual bonus for free, please send email to HROne Payroll Expertise at firstname.lastname@example.org.
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