Should you be taxed on your end of year bonus?

After a long year, you may be fortunate enough to be offered a bonus by your employer. This means that you will have the opportunity to spoil your loved ones, pay off your debt, or contribute towards your savings or investments.

However, did you know that your bonus is subject to taxes? We have a look at what you should expect, and what you can do to reduce your tax burden.

Tip: Make use of our income tax calculator to see which tax bracket you fall under.

Will you be taxed on your bonus?

According to Sheldon Friedericksen, CFO of Fedgroup, employee bonuses are a discretionary payment, and are subject to taxation.

“Your full remuneration as a South African resident is required to be taxed, including any annual incentives that you are paid,” says Friedericksen.

Ruan van Jaarsveld, manager in the advisory division at Hobbs Sinclair, notes that the amount of tax paid will depend on the calculation method your company uses.

“Some companies allow employees to pay additional tax during ‘normal’ months, and then the bonus is seen to be ‘tax free’,” says Van Jaarsveld. However, he cautions that a bonus contributes to your taxable income and can move you into another tax bracket.

READ MORE: How to choose a tax practitioner – ask these questions

Practical example of calculating tax on your bonus

Nicci Courtney-Clarke, head of tax at TaxTim, gives the following tax calculation examples.

Thandi is a 40-year-old fashion buyer who works for a successful retail clothing brand. She earns R20,000 as a basic salary each month, but in March 2020 she received an annual performance bonus of R10,000.

Thandi’s typical rate of tax on her basic salary is as follows.

Annual taxable income is R20,000 x 12

= R240,000

Using the 2020/2021 tax rate tables, Thandi will pay tax at a rate of R37,062 + 26% of her taxable income above R205,900. As a 40-year-old, she’s eligible for the primary rebate of R14,958.

Annual tax payable = R37,062 + [26% x (R240,000 – R205,900)]

= R37,062 + [26% x R34,100]

= R37,062 + R8,866

= R45,928

Next, we deduct the primary rebate of R14,958.

R45,928 – R14,958

= R30,970

If we divide this amount by 12, we’ll see the monthly tax amount Thandi pays on her basic salary.

Monthly tax = R30,970 / 12

= R2,580.83

To skip the math, go to our income tax calculator to help you work out your tax liability.

Having worked out her basic tax liability, the following looks at the two methods companies generally use to calculate tax on bonuses.

1. Method One: Annualisation of Income

In this method, the total income for the month (basic salary plus bonus amount) is annualised – or multiplied by 12 – to determine the annual taxable amount.

In our example, Thandi received a bonus of R10,000 in March 2020. With her salary of R20,000, this pushed her total monthly income to R30,000. Multiplied by 12, her assumed annual taxable income is R360,000.

The annual tax amount on R360,000 is R64,090. In March 2020, Thandi would therefore pay R5,340.83 (R64,090 divided by 12) tax on her payment of salary and bonus.

The downfall of this method is that the calculation assumes that you’ll be receiving the higher income for every month of the tax year, which is obviously not the case.

The good news is that when it comes to tax filing season, you’re likely to have been overtaxed and therefore should be due a refund from SARS.

2. Method Two: Balance of Remuneration

The second method provides a more accurate view of income and therefore a more precise tax amount.

In this method, the tax for the year is worked out, first with no bonus involved, then with a bonus added. The difference between the two is added to the “normal” tax amount.

Thandi’s annual income was R240,000, giving a tax amount of R30,970.

Adding a bonus amount of R10,000 to R240,000 totals R250,000. The Income Tax Calculator shows that the annual tax due on this amount is R33,570.

Therefore, the difference is:

R33,570 – R30,970

= R2,600

Thandi’s total tax for March 2020 will then be:

Usual tax + tax on bonus amount

= R2,580.83 + R2,600.00

= R5,180.83

This method gives a lower tax amount than the annualisation method does, meaning that the tax being withheld is closer to Thandi’s eventual tax liability.

While our example only shows a difference of R160, where the bonus amount is substantially more than the usual pay, the annualisation method would inflate the annual taxable income considerably.

Irrespective of which method your payroll uses to determine tax on any bonus amount, you should always file a tax return with SARS to claim back any overpaid tax.

How can you reduce this tax burden?

Friedericksen says that if you are looking at ways to reduce your tax burden this year, there are a number of tax-efficient investment vehicles that you can take advantage of.

He believes that the most efficient method is through your employer, where you allocate your bonus as a contribution towards your retirement fund.

“This will enable you to invest your bonus, and reduce your current tax burden through the retirement fund deduction,” says Friedericksen.

Read more about Tax-free savings accounts which are another tax saving investment.