Annual Bonus Tax Calculation

Global Payroll for China supports two annual bonus tax calculation methods:

  1. Calculation of annual bonus tax by itself based on the bonus amount.

    The method is the system’s default option. Based on the legislation, this method is valid until December 31, 2021.

  2. Calculation of tax (which combines both annual bonus tax and income tax as one amount) based on the bonus amount and regular income.

    This method is available for selection currently, and will become the only supported method starting on January 1, 2022.

The system uses the variable CN VR BONUS TX IND to determine the method used for the calculation. Set the value to N (default) to calculate the standalone annual bonus tax based on the bonus amount only. Specify Y to calculate tax based on the bonus amount and regular income.

Important:

Select the bonus tax calculation method of your choice at the beginning of the year and refrain from making any changes. Changing the value later in the year can result in incorrect tax calculation.

Annual Bonus Tax Calculation Based on Bonus Amount

This diagram illustrates the flow of annual bonus tax calculation that is based on the bonus amount:

This diagram illustrates the flow of annual bonus tax calculation that is based on the bonus amount.

Annual bonus tax calculation

The ANN BONUS TAX deduction invokes the formula CN FM CALC SP TAX, which derives the annual bonus tax based on calculated annual bonus. CN FM CALC SP TAX then calls formula CN FM CALC TAX to calculate tax.

The formula CN FM CALC SP TAX:

  1. Divides the annual bonus amount by 12.

  2. Calls formula CN FM CALC TAX.

    1. References the tax table CN BR TAX RATE to obtain the tax rate and quick calculation deduction using the calculated result from step 1, and calculates the withholding amount for the payee's annual bonus for one pay period in the current financial year.

    2. Subtracts the reduction from the tax amount if the payee is eligible for disability reduction. If a payee override exists, the assumption is that it overrides an amount; otherwise, the formula uses the percent value retrieved from the CN BR TX EXEMPTION bracket.

      Therefore, if an override exists, the tax withheld equals the tax amount from step 2a minus the override amount. If the tax withheld is less than zero, the formula sets the tax to zero. If no override exists, the formula subtracts the reduction percent from the tax withheld from step 2a.

  3. Subtracts any annual bonus tax already calculated in the month.

Combined Tax Calculation Based on Bonus Amount and Regular Income

For the combined (annual bonus and income) tax calculation method, the calculation is handled using the formula CN FM CALC NMYR TX. When the variable CN VR BONUS TX IND is set to Y, the formula calls the formula CN FM BON TX REG to include the annual bonus amount in the total taxable income for the calculation.

The system uses the delivered bonus earning 13THMNTH PAY in the tax calculation.

The bonus amount is added to these accumulators to support the calculation: Taxable ANNBON YTD (yearly taxable annual bonus), TAXABLE NORMAL MTD (monthly taxable normal earnings), TAXABLE NORMAL YTD (yearly taxable normal earnings), and CN AC SAL SUM SEG (summary of salary seg.).

Note:

When you generate the Individual Income Tax Withholding Return report on the Tax Reports CHN Page, select the Salary/Wage category of income option for the bonus amount (if available) to be reflected in the taxable income amount on the report. The process does not generate any reports if the Annual Bonus option is selected.

See Normal Tax Calculation.