Activating bonus tax provisions

Activating bonus tax provisions

Human Resources, Tax

Author: Karl van der Merwe

As the economy starts recovering to pre-COVID times, we are seeing more payrolls requiring the activation of bonus tax provisions.

A bonus provision is the accounting provision of funds to pay a bonus during the bonus period.

A bonus tax provision is an additional ‘earning’ that is added to an employee to inflate the taxable earnings, for the purpose of increasing the employee’s tax to such a point that when the bonus is paid the value of the tax on said bonus has already been paid.

For those navigating legislative and perception challenges, this can be an attractive option for employees.

The bonus in and of itself is the first part to consider; is the bonus guaranteed, does it form part of the package, and on what value is it based? While these questions exclude the bonus tax provision, they will impact on the decision-making process.

The next point to consider is the period over which the tax provision will run. This is generally 12 months, but this may not be practical for your situation or the date of increase, and what the bonus is based on may need to be taken into account in determining the length of the tax provision. Having said that, the general duration is between 10 and 12 months as anything less is overly onerous on the employee’s taxation. Also remember that the while the provision for bonus can run across tax years, the bonus tax provision cannot.  This may also need to be considered.

In addition, when looking at the value of the bonus in relation to the tax provision amount, one must ascertain what to do in cases of fluctuations in the bonus value, for example, what happens to the bonus tax provision when the employee gets an increase? Where the bonus is part of a total cost of employment scenario, what happens when there are fluctuations to the components that make up the total cost? These could potentially significantly affect the bonus provision as well as the bonus tax provision.

If you already have a robust policy in place with regards to bonuses then you are on the right path, as these policies and procedures will form the basis of when and how much bonus is paid (including pro rata bonuses).

The final consideration is the payroll system that is being used, as some allow for automatic bonus tax provision, others need more configuration and customisation, and others still require manual intervention.

The challenges that this specific payroll element presents can seem daunting, but it does have its place and is a firm favourite amongst staff (assuming it all works as intended). If you are considering a bonus tax provision for your staff, carefully think through all the scenarios applicable to your organisation first. If you are unsure about anything, consult with a payroll professional like HRTorQue.

To discuss any of your tax needs or challenges, contact us on [email protected].