The Tax Incentive Policy for Year-End Bonuses Extended for an Additional 4 Years!
On the 28th, the Ministry of Finance and the State Administration of Taxation jointly issued the ‘Announcement on the Extension of the Implementation of the Personal Income Tax Policy for Year-End Bonuses’ (referred to as the ‘Announcement’). In an effort to further alleviate the tax burden on taxpayers, the ‘Announcement’ stipulates that for individual residents who receive year-end bonuses, and meet the criteria outlined in the ‘Circular of the State Administration of Taxation on Adjusting the Calculation and Collection of Individual Income Tax on Year-End Bonuses and Related Matters’ (SAT Circular [2005] No. 9), these bonuses will not be included in the calculation of their annual comprehensive income. Instead, the total year-end bonus income will be divided by 12 months to determine the monthly equivalent amount. Subsequently, tax rates and standardized deduction amounts will be applied based on the monthly conversion tax rate table provided in the ‘Announcement,’ allowing for a separate tax calculation. Alternatively, residents also have the option to include this income in their annual comprehensive income for taxation purposes. The provisions of the ‘Announcement’ will be in effect until December 31, 2027.
1. What constitutes a year-end bonus?
A year-end bonus refers to a one-time bonus granted to employees by withholding entities such as governmental bodies, enterprises, and institutions. This bonus is awarded based on an evaluation of the entity’s overall annual financial performance and a comprehensive assessment of the employees’ year-long work performance. It encompasses various forms of rewards, including year-end salary increases, annual salary schemes, and performance-based compensation, as determined by the entity in accordance with their performance evaluation.
2. Can semi-annual bonuses be treated as equivalent to year-end bonuses?
No, they cannot. Any additional bonuses received by employees, such as semi-annual bonuses, quarterly bonuses, overtime pay, excellence awards, attendance bonuses, or any other types of bonuses besides year-end bonuses, should all be combined with their monthly wages or salary income and subjected to individual income tax in accordance with tax regulations.
3. How many times can the separate taxation method for residents who receive year-end bonuses be applied within a single tax year?
Within a single tax year, this separate taxation method can only be applied once for each taxpayer.
4. If a company opts to include year-end bonuses as part of regular salary income for withholding and prepayment, can it still choose to calculate taxes separately during the annual comprehensive income settlement?
No, it cannot. If a company decides to include year-end bonuses as part of regular salary income for withholding and prepayment, it is not permitted to separate this bonus when calculating taxes during the annual comprehensive income settlement conducted from March to June of the following year.
5. Can bonuses received in different months be combined into an annual bonus?
As per the ‘Administrative Measures for Withholding and Reporting of Individual Income Tax (Trial)’ (Announcement No. 61 of 2018 by the State Administration of Taxation), when employers withhold income tax for wage and salary payments to individual residents, they should calculate the cumulative pre-withholding tax using the cumulative withholding method and report withholding taxes on a monthly basis. Therefore, bonuses received in different months should be reported and withheld separately and cannot be consolidated.
6. If I opt for the separate taxation policy for year-end bonuses, how should I calculate the income tax on my annual bonus?
For residents who receive year-end bonuses and meet the criteria outlined in the ‘Notice of the State Administration of Taxation on Adjusting the Calculation and Collection of Individual Income Tax on Year-End Bonuses’ (Guoshuifa [2005] No. 9), the year-end bonus income should not be included in the annual comprehensive income until December 31, 2023. Instead, it should be divided by 12 months to calculate a monthly equivalent. Then, referring to the monthly comprehensive income tax rate table after conversion, determine the applicable tax rate and quick deduction amount. Individual income tax can be calculated separately using the following formula:
Tax Payable = Year-End Bonus Income × Applicable Tax Rate – Quick Deduction Amount
For example: If Mr. Zhang receives a year-end bonus of 42,000 RMB and chooses to utilize the separate taxation policy for year-end bonuses, his tax calculation would proceed as follows. Firstly, divide 42,000 RMB by 12 months to derive 3,500 RMB. Next, consult the monthly tax rate table to discover that 3,500 RMB corresponds to a tax rate of 10% with a quick deduction amount of 210 RMB. Finally, compute the tax payable by multiplying the bonus income by the tax rate and subtracting the quick deduction amount: 42,000 × 10% – 210 = 3,990 RMB. Consequently, Mr. Zhang’s tax payable for the year-end bonus would amount to 3,990 RMB.
7. I heard that year-end bonuses can be taxed together with comprehensive income or separately based on the year-end bonus policy. Which taxation method is more advantageous for me?
When choosing a taxation method, it is recommended that you consider your individual circumstances and select the option that is most favorable to you.
Example 1: Mr. Zhao earns an annual salary of 200,000 RMB, and he receives a year-end bonus of 24,000 RMB. Assuming he can claim deductions for social security contributions, provident fund, and supporting elderly family members totaling 44,000 RMB. During the annual tax settlement, how should he pay taxes? There are two options: Firstly, he can combine the 24,000 RMB bonus with his 200,000 RMB salary for taxation. After deducting the standard deduction of 60,000 RMB (5,000 RMB per month) and the 44,000 RMB deductions, he arrives at a taxable income of 120,000 RMB. Using the annual comprehensive income tax rate table, his tax liability would be 120,000 × 10% – 2,520 = 9,480 RMB. Secondly, he can choose to tax the 24,000 RMB bonus separately, resulting in a tax liability of 720 RMB. For the 200,000 RMB salary, after deducting the 60,000 RMB standard deduction and the 44,000 RMB deductions, the tax liability would be 96,000 × 10% – 2,520 = 7,080 RMB. In total, the tax payable would be 7,800 RMB. In this case, there is a 1,680 RMB difference in tax liability, and Mr. Li finds it more advantageous to choose separate taxation.
Example 2: Mr. Zhu earns an annual salary of 120,000 RMB and receives a year-end bonus of 60,000 RMB. Assuming he can claim deductions for social security contributions, provident fund, and supporting elderly family members totaling 40,000 RMB. During the annual tax settlement, if Mr. Zhang chooses to separately tax the year-end bonus, he would have a tax liability of 5,790 RMB on the 60,000 RMB bonus and a tax liability of 600 RMB on the 20,000 RMB salary (after deducting the 60,000 RMB standard deduction and 40,000 RMB deductions), resulting in a total tax payable of 6,390 RMB. However, if he combines the year-end bonus with his regular salary for taxation, the tax liability would be 5,480 RMB on the 80,000 RMB income (after the same deductions). In this scenario, he would pay less tax by including the year-end bonus in the comprehensive income.
For specific operations, you can use the mobile tax app to select either the combined taxation or separate taxation method. The tax app will automatically calculate the results, allowing you to compare and choose the more advantageous option.
