The annual bonus in China is a big deal. It is common to see companies pay one extra month’s salary, or even more based on performances at the end of the year.
For this reason, great importance is attached to the year-end bonus by both employees and employers.
It is also important to consider the taxation about the annual bonus in China, so to avoid problems with wrong calculations and fines if you are not compliant with the law.
In this article, we provide a guide to understanding more about the year-end bonus in China and things that employers have to consider when calculating taxes for it.
Tax on the one-time annual bonus in China
The one-time annual bonus in China 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 the tax on the 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.
Formula: Tax payable on year-end bonus = Taxable annual bonus amount x Applicable tax rate – Quick deduction.
For example: The applicable tax rate for a RMB 120,000 bonus is 10 percent (RMB 120,000 / 12 months = RMB 10,000).
Following are the methods of calculating the tax on the gross one-time annual bonus:
- 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.
- Calculating the tax payable on the employee’s one-time annual bonus obtained in that specific month as per the applicable tax rate and the quick deduction determined under item 1, with the formula of calculation as follows:
- 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 a gross annual bonus and then be taxed accordingly.
The method for converting the net annual bonus to gross annual bonus is as follows:
- 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.
Changes to the calculation for the IIT on the annual bonus from 2022
The tax payment method of the year-end bonus will change in 2022. In short, before the end of the year 2021, there are two tax calculation methods for individual tax payments, namely, separate tax calculation and consolidated tax calculation. By next year, there will be only one way of consolidated taxation.
What does it mean?
We will show you the changes with two examples:
- For people whose salary is higher than the year-end bonus:
Take an individual with an annual taxable income of 150,000 yuan (tax base after pre-tax income deducting insurances and one fund, 60,000 yuan threshold, special additional deduction, etc.). Assuming that his year-end bonus is 30,000 yuan, if the tax is calculated in a consolidated way (that is, the tax method after this year), the tax rate of 20% is applicable to the 30,000 yuan, and the individual income tax is 6,000 yuan. That is, the final year-end bonus is 24,000 yuan.
In the same situation for the above individuals, assuming that the tax is calculated separately (the tax method can still be selected this year), the 3% tax rate is applicable to the 30,000 yuan year-end bonus, the individual income tax is 900 yuan, and the final year-end bonus is 29,100 yuan.
Therefore, in the above cases, individuals with an annual taxable income of 150,000 yuan can pay 5,100 yuan less personal tax this year than from 2022.
- For those whose year-end bonus is higher than their salary:
Let’s say an employee of company A, in 2020, after deducting insurances and one fund and exemption, has a taxable income of 30,000 yuan and a year-end bonus of 270,000 yuan. If the tax is calculated separately, the employee needs to pay a total of 52,590 yuan of tax and 900 yuan of salary tax, totaling 53,490 yuan.
If the tax is calculated on a consolidated basis, a total of 43,080 yuan of individual income tax shall be paid.
For the employee, the annual income difference between the two tax methods is 10,410 yuan.
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