Bonus Tax Method

This calculation method depends upon whether the bonus payment is included with the regular earnings (using the annualized tax method) or the bonus payment is paid on a separate cheque.

Note: Any payment that is using the bonus tax method is referred to as a "bonus payment" for the purpose of this documentation.

When bonus is included with Regular Earnings (annualized tax method), in addition to the 3 Calculation Steps outlined, the first 2 Steps are to calculate pay period income taxes on the Regular Earnings using the Annualized Tax Method.

Calculation Step 1 – Determine annual taxes payable by annualizing the Regular Earnings.

Calculation Input - The following will derive annual taxable gross: Regular Earnings X total pay periods in the year.
Calculation Output - Perform the annualized tax calculation to produce the annual income taxes.

Calculation Step 2 - Determine pay period income taxes for the Regular Earnings.

Calculation Input - The following will derive pay period income taxes: Annual income taxes (from Step 1) / total pay periods in the year.
Calculation Output - Pay period income taxes on the Regular Earnings.

The following table shows how the system calculates the tax payable when the bonus is included with regular earnings:

Calculation Step	Calculation Input	Calculation Output
1. Determine annual taxes payable using annualized earnings including the bonus payment.	The following will derive annual taxable gross: (CIT taxable earnings gross year-to-date [YTD], including YTD bonus) + (current annualized tax method earnings Х no. of pays remaining in the year including the current period) + (current bonus payment)	Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.
2. Determine annual taxes payable using annualized earnings excluding the current bonus payment.	The following will derive annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (current annualized tax method earnings Х no. of pays remaining in the year including the current period)	Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.
3. Determine pay period income taxes payable on the bonus payment.	The following will derive pay period income taxes on the bonus payment: (Base Amount A – Base Amount B)	Pay period income ax payable on bonus payment.
4. Determine pay period income taxes for the Regular Earnings and the Bonus payment.	The following will derive pay period income taxes for both Regular Earnings and the Bonus payment: Pay period income taxes on the Regular Earnings + Pay period income taxes on the Bonus payment	Total pay period income taxes for this combined payment (cheque).

This table shows how the system calculates the tax payable when the bonus is paid on a separate cheque with no regular earnings:

Calculation Step	Calculation Input	Calculation Output
1. Determine annual taxes payable based on estimated annualized earnings including the bonus payment.	The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period) + (current bonus payment)	Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.
2. Determine annual taxes payable based on estimated annualized earnings excluding the current bonus payment.	The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period)	Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.
3. Determine taxes payable on the bonus payment.	(Base Amount A – Base Amount B)	Tax payable on bonus payment.

Calculation Step

Calculation Input

Calculation Output

1. Determine annual taxes payable based on estimated annualized earnings including the bonus payment.

The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period) + (current bonus payment)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.

2. Determine annual taxes payable based on estimated annualized earnings excluding the current bonus payment.

The following will derive projected annual taxable gross:

(CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.

3. Determine taxes payable on the bonus payment.

(Base Amount A – Base Amount B)

Tax payable on bonus payment.

The estimated projected earnings from the employee's Job Data record is calculated by this formula: (annual rate from the employee's Job Data record / no. of pays in the year to derive a pay period rate) × number of pays remaining in the year including the current period.

Bonus Tax Method

Bonus Included with Regular Earnings

Bonus Paid on a Separate Cheque