Provision for Tax on Annual Bonus

An annual bonus is a great way to reward an employee for their hard work during the year. However, the positive impact of that reward is often diminished by the amount of tax that the employee has to pay in the period when the bonus is paid.

One way of dealing with this is to spread the tax on an annual bonus over a number of pay periods. The employee will end up paying the same amount of tax on the bonus, but if the tax is spread, they can set aside money – by means of regular payslip deductions – which can be paid out to them in the same pay period as when the annual bonus is paid. In this way, they will get the full benefit of the bonus when it is paid.

SimplePay has a built-in item to accommodate the special tax and reporting requirements related to a savings-like item such as this. You just capture some basic information about the planned bonus, and the system automatically calculates the amount to be saved/provisioned in each pay period in order to cover the tax on the bonus – and deducts this amount from the employee’s Nett Pay.

Important

Before using this item to help your employee save/provision for the tax on a future bonus, it is advisable to obtain their consent in writing.

Also, please note that the item should be used only for guaranteed, non-discretionary bonuses.

Setting up the item

To add this Provision for Tax on Annual Bonus system item for an individual employee:

1. Go to the employee’s profile, and click Add next to Regular Inputs.
2. Click Provision for Tax on Annual Bonus under Deduction.

3. Enter the amount of the Estimated Annual Bonus.

   Estimated Annual Bonus amount

   It is possible to change the amount later on – even after finalising one or more payslips. As mentioned on the screen, a changed bonus amount will result in different provisioned amounts being deducted from that point onward.

   If the amount of the actual bonus – which has to be added separately as a once-off item in the period that it is paid (see below) – ends up being different from the Estimated Annual Bonus amount, a warning message will appear. No action is required; it merely informs you that there might be a discrepancy between the provisioned tax and the actual tax on the bonus.

4. Choose one of the options for the Period for Tax Provision:

   • Up to Date of Payment – Spreads the tax evenly over the periods until the annual bonus is paid so that enough money is saved to meet the tax obligation by the time the annual bonus is paid to the employee.
   • Remainder of Tax Year – Spreads the tax evenly over the pay periods remaining in that tax year so that enough money is saved to meet the tax obligation by the end of the tax year.

   Remainder of Tax Year

   If this option is selected, and the paying out of the bonus and the provisioned tax on such bonus happens before the end of the tax year, you are actually lending the employee the difference between the full amount of tax on the bonus and the amount that they have already saved/provisioned. SimplePay does not cater for any interest calculations in this regard.

5. Enter the Estimated Date of Payment.

   Estimated Date of Payment

   This field is available only with the “Up to Date of Payment” option.

   It must be a date within the current tax year. The tax cannot be spread over multiple tax years.

   The date will usually be in the future. You can enter a date in the past, but if it is on or before the end date of the current pay period, you will receive an error message about having to pay out any tax that has already been provisioned – on the current payslip.

   It is possible to change the date later on – even after finalising one or more payslips. A changed bonus payment date will result in different provisioned amounts being deducted from that point onward.

   Once you reach the pay period in which this date falls, you will see a message prompting you to pay out – on that payslip – the amount that has been saved/provisioned for tax up to that point.

6. Click Save.

It is also possible to add this item in bulk. You can do so as follows:

• Go to Employees > Bulk Actions > Regular Inputs (under Payroll Inputs).
• Click on the first dropdown menu, and select “Provision for Tax on Annual Bonus” under Deduction.
• Complete the relevant fields (described above).
• Click Save.

Managing the item

Once you’ve added the item, as described above, you will notice Provision for Tax on Annual Bonus appearing under both Regular Inputs and Payslip Inputs.

Regular Inputs

In this section, you can view all the information you entered while setting up the item. Click on Provision for Tax on Annual Bonus to make changes to such information.

Payslip Inputs

In this section, you will see the following:

• Deductions Remaining in Provisioned Period – The number of periods between the current pay period and:
  • the pay period in which the Estimated Date of Payment falls (if available); or
  • the final pay period of the tax year.

Deductions Remaining in Provisioned Period

The first deduction will be made on the payslip for the period in which the item is added, and the last deduction will be made in the period in which you plan to pay the bonus, or in the last pay period of the tax year.

Both these deductions are included in the initial number of Deductions Remaining in Provisioned Period.

• Tax Provisioned to Date – The total amount of provisioned tax that has been deducted up to the start of the current pay period.
• Closing balance – The total amount of provisioned tax that has been deducted – after taking the deduction on the current payslip into account.

You also have the option to click on Provision for Tax on Annual Bonus. When you do this, you can check the Pay out Tax Provision on Current Payslip box (see below). Paying out the provisioned tax is compulsory in the following scenarios:

• The Estimated Date of Payment has been reached.
• It is the last pay period of the tax year.
• The employee’s employment has been terminated, and it is the final payslip of their service period.

Paying out the provisioned tax ahead of time

If the annual bonus is being paid in the current pay period, but this is before the period in which the Estimated Date of Payment falls, or before the last pay period of the tax year, you can pay out the provisioned tax on this payslip.

Paying out the tax provision on the current payslip

If the Period for Tax Provision was set as “Remainder of Tax Year”, and the Pay out Tax Provision on Current Payslip box is ticked, the Type of Payout field will appear, with the following options:

• Pay out full tax provision – Select this to pay out the full tax amount for the year. Future payslips will continue provisioning tax. The Closing balance of the Provision for Tax on Annual Bonus will go into a negative because the Payout Amount is larger than the Tax Provisioned to Date. However, as more tax is provisioned on future payslips, the Closing balance will go back up (to zero) by the end of the tax year.
• Pay out tax provisioned to date – Select this to pay out only the tax provisioned to date. No further tax will be provisioned.

With the “Up to Date of Payment” option, the net effect of the provision item will be a payout of the amount of tax that has been provisioned up to the start of the current pay period.

Adding an annual bonus

If you pay out the provisioned tax – without also adding an annual bonus on that payslip – you will see a message reminding you to add an annual bonus if you want to offset the provisioned tax (i.e. the amount that has been saved) against the tax on such annual bonus.

The link in the message will take you to the Add Annual Bonus screen. However, if you choose to use an Annual Payment instead (under Payslip Inputs), the feature will work in the same way.

Basic example - Up to Date of Payment

Let’s assume that the current pay period is March, and that a monthly-paid employee will receive a guaranteed bonus (13th cheque) of R10 000 in December (of the same year).

Further, let’s assume that the tax on the bonus (when it is paid in December) will be R2 600. When you now add the Provision for Tax on Annual Bonus to the March payslip, the effects will be as follows:

• The R2 600 tax will be spread over 10 months (i.e. from March to December). That means the amount of tax that will be saved/provisioned each month is R2 600 ÷ 10 = R260.
• R260 will be deducted from the Nett Pay in each of the 10 months and accumulated as “Tax Provisioned to Date”.

When you get to the December payslip, the system will remind you that you’ve reached the Estimated Date of Payment, and you will be prompted to pay out the provisioned tax.

If you hadn’t yet added an annual bonus to the December payslip, you will be reminded to do that, too. When you now finalise the December payslip (after having paid out the provisioned tax and added the bonus), you will see that December’s Nett Pay is exactly R10 000 more than the Nett Pay of November (and the preceding months).

In other words, the employee can enjoy the full bonus in the month that it is paid as the provisioned tax paid out will offset the tax that is paid on the bonus.

This is what your screen will look like when you have finalised the payslip in the last pay period:

Salary changes

If the employee’s salary changes before the bonus is paid, the tax calculations will be reperformed automatically, and the amount of tax to be provisioned will be updated accordingly, if necessary.

Paying out the annual bonus

When the time comes that you want to pay out the actual annual bonus, you will have the option to do so – as a once-off item:

• on a regular payslip; or
• on a once-off payslip.

Paying out a bonus

If you use the Provision for Tax on Annual Bonus item, the actual bonus will not be paid automatically (on the Estimated Date of Payment). You still have to add the bonus under Payslip Inputs.

Once-off payslips and paying out provisioned tax

If you use a once-off payslip, you can choose to pay out the provisioned tax on either such once-off payslip or a regular payslip – as long as the date of the once-off payslip (and the paying out of the provisioned tax) is before the end of the pay period in which the Estimated Date of Payment falls.

Other

Employment types

It is possible to use this system item only for employees in standard employment. Therefore, it will not be available for the following:

• Employees in non-standard employment
• Independent contractors
• Employees for whom tax is not calculated, such as Resident Directors
• Employees for whom a tax directive is in place

Reports

Information about this item can be found in the following reports:

• Transaction History Report
• Balances - Loans, Savings and Garnishees
• Variance Report

Please see the following section for more information:

• Reports

Savings item

With the Provision for Tax on Annual Bonus item, there might be fluctuations in the regular deduction amount; for example, if there are changes to the employee's salary or planned bonus.

If an employee prefers that a fixed amount (i.e. a pre-determined amount that they agreed to) be deducted from their payslip – to save/provision for the tax that will have to be paid on a future bonus – you can use our Savings system item for this purpose.

You can create a custom item based on the Savings item (which will allow you to rename the item as needed). This item will result in a fixed regular deduction on the payslip. The balance of this savings-like item can be paid out anytime. This payout will not be taxed as the deductions made on previous payslips were from after-tax income. Therefore, you can pay out the balance (of the custom Savings item) on the desired payslip, and the employee will receive the full amount.

Other uses for the Savings item

Using a custom item that is a copy of our Savings item, as described above, can be useful in the following scenarios, too:

• Your employee wants to save for the tax on a bonus over multiple tax years.
• You want to pay more than one bonus during the tax year.

However, you will have to do the calculation of the regular savings deductions manually.

Please see the following help pages for further guidance on using the savings and custom items:

• Savings
• Custom Items

Reporting to SARS

The use of this item is an internal matter between you and your employees. Even though you will make savings/provision deductions on multiple payslips, you are required to report the additional PAYE liability related to the bonus only in the period that the bonus is paid and not in each period in which the savings/provision deduction occurs.