Calculating Annual Taxable Income Using the Annualized and Bonus Tax Methods

The following describes the calculations when both the annualized and bonus tax methods are applicable on a single cheque. The initial calculation is Annualized, then Bonus and the results from the two are combined and reported on the single cheque.

Annualized tax method

For the Annualized tax method, the system calculates Pay Period Taxable Gross as usual (taxable pay period earnings plus taxable benefits less before-tax deductions). If you use Payline One-time Deductions to enter a before-tax deduction for Plan Type 8x and/or 4x using the Override feature, this deduction is used during the bonus tax method calculation. The deduction is not dependant on the payline that you enter it on if multiple paylines are applicable to segregate annualized tax method earnings versus bonus tax method earnings. This produces accurate ‘annualized' pay period income taxes.

Bonus tax method

For the Bonus tax method, the system initially determines Annualized Taxable Income inclusive of the bonus tax method payment by using the employee's pay period taxable gross per the above multiplied by the pay periods remaining in the year (including the pay period that is being run) plus the employee's YTD taxable gross plus the bonus tax method payment. With the Override Payline One-time Deduction entry for Plan Type 8x and/or 4x, this amount reduces Annual Taxable Income. To calculate income taxes specific to the bonus payment, the system now determines the Annualized Taxable Income excluding the bonus tax method payment by using the employee's pay period taxable gross per the above multiplied by the pay periods remaining in the year (including the pay period being run) plus the employee's YTD taxable gross. The Override Payline One-time Deduction entry for Plan Type 8x and/or 4x reduces Annual Taxable Income. This process produces accurate results provided the employee's Pay Period Taxable Gross is representative of their normal pay period taxable earnings. The resulting net of the above two calculations is the income tax on the bonus payment.

When multiple tax sets (annualized and bonus) are applicable, during the bonus tax calculations, Plan Type 00 (General Deductions) before-tax deductions when entered as Override entries on Payline One-time Deductions are not treated the same as Plan Type 8x and 4x. These (Plan Type 00) entries reduce Pay Period Taxable Gross. When the Bonus Tax Method is the only tax method applicable, Plan Type 00 before-tax deductions reduce Annual Taxable Income.

Note:

To generate the best possible results when one-time reductions to Annual Taxable Income are desired, PeopleSoft recommends that you do not combine tax methods on a single cheque to create a multiple tax set situation where the Bonus Tax Method is one of them.

Example: Annualized and Bonus Tax Method on One Cheque with Payline One-Time Deductions

Provided the Annualized Tax Method earnings are representative of the employee's regular pay period earnings, the resulting income taxes should be considered reasonable and acceptable.

The pay calculation process calculates income taxes based on each tax set and combines the results. The initial tax calculation is the Annualized Tax Method. The process follows the guidelines noted in the "Calculating Annual Taxable Income Using the Annualized Tax Method" topic. The Bonus Tax Method follows the steps outlined in the "Calculating Annual Taxable Income Using the Bonus Tax Method" topic with an exception in the way the system processes Payline One-time Deductions for Plan Type 00 (General Deductions). With the inclusion of the Annualized Tax Method, any before-tax deduction (Plan Type 00) entries entered as Override are applied against the Pay Period Taxable Income during the calculation of the Annualized Tax Method. Therefore, when this multiple tax set situation is applicable, only Payline One-time Deduction entries for Plan Type 8x and 4x reduce Annual Taxable Income during the Bonus Tax Method calculation.

Annualized tax calculation: (Bi-weekly payroll – 26 pay periods); derive annual taxable gross:

  • Regular pay period taxable earnings = 2,500.00 CAD

  • Pay period taxable benefits = 75.00 CAD

  • Pay period before-tax deductions (these are before-tax deductions the employee is enrolled in) = 200.00 CAD

  • Pay Period Taxable Earnings = 2,375.00 CAD

  • Annual Taxable Income = (2,375.00 CAD– 450.00 CAD) x 26 pay periods = 50,050.00 CAD

  • Payline One-time Deduction (before-tax, Plan Type 8x) = 1,500.00 CAD (to be applied in the Bonus Tax Calc)

  • Payline One-time Deduction (before-tax, Plan Type 00) = 450.00 CAD (to be applied against Pay Period Taxable Income)

  • Adjusted Annual Taxable Income = 50,050.00 CAD

The annualized tax calculation uses 50,050.00 CAD to derive the pay period income taxes.

Bonus tax calculation:

  • Regular pay period taxable earnings = 2,500.00 CAD

  • Bonus Tax Method taxable earnings = 15,000.00 CAD

  • Pay period taxable benefits (Benefit and General Deductions Taken are set to NONE) = 75.00 CAD

  • Pay period before-tax deductions (Benefit and General Deductions Taken are set to NONE) = 200.00 CAD

  • Payline One-time Deduction (before-tax, Plan Type 8x) = 1,500.00 CAD (to be applied in the Bonus Tax Calculation)

  • Payline One-time Deduction (before-tax, Plan Type 00) = 450.00 CAD (to be applied against Pay Period Taxable Income)

  • Pay Period Taxable Earnings are applicable and the tax calculation process uses this information to derive a pay period taxable income. For this example, the Pay Period earnings are 2,500.00 CAD and the YTD Taxable Income is 40,000.00 CAD with 10 pays remaining in the year, which would include the current pay period.

  • Annual Taxable Income = (regular pay period taxable earnings 2,500.00 CAD + taxable benefits 75.00 CAD – before-tax deductions 200.00 CAD – Payline One-time Deduction for Plan Type 00 450.00 CAD) x Pays remaining in the year 10) + YTD Taxable Income 40,000.00 CAD + the Bonus Tax Method taxable earnings 15,000.00 CAD = 74,250.00 CAD

  • Payline One-time Deductions (before-tax, Plan Type 8x) = 1,500.00 CAD

  • Adjusted Annual Taxable Income = 72,750.00 CAD

The 72,750.00 CAD is used in the initial tax calculation process, which includes the payment of the Bonus Tax Method earnings. The next tax calculation process will use the same as itemized above but exclude the Bonus Tax Method taxable earnings (15,000.00 CAD). The net result of these two tax calculations determines the income taxes specifically on the Bonus Tax Method taxable earnings.

Combine the annualized pay period income taxes with the income tax on the bonus payment subject to the Bonus Tax Method to derive the income taxes applicable to the single cheque.