Calculating Annual Taxable Income Using the Bonus Tax Method

This topic applies to the bonus tax method with no annualized tax method earnings, only the single tax set (bonus). To calculate reasonable results based on the formulas provided, Pay Period Taxable Gross is established from the employee's Job Record (compensation) and multiplied by the number of pay periods remaining in the pay year plus the employee's YTD taxable gross.

When you use Payline One-time Deductions to enter before-tax deductions for Plan Type 8x (Pension Plans), Plan Type 4x (Savings Plans), and Plan Type 00 (General Deductions) using the Override feature, these entries reduce the Annual Taxable Gross on a one-time basis. Although not recommended, if Addition (instead of Override) were used and combined with the employee's enrolled amount, this would also be treated as a one-time reduction to the Annual Taxable Income.

Entries that you create for before-tax deductions for Plan Type 8x (Pension Plans), Plan Type 4x (Savings Plans), and Plan Type 00 (General Deductions) using the Deduction Subset feature reduces Annual Taxable Gross on a one-time basis.

Note:

The design is intended to accommodate specific Plan Types (8x, 4x and 00). However, to eliminate the potential creation of Pay Period Taxable Income the design allows for any before-tax deductions to be entered through the Payline One-time Deductions page. ALL (all Plan Types) before-tax deductions that you enter through Payline One-time Deductions reduce Annual Taxable Income. This produces reasonable results in comparison to allowing this scenario to have multiple tax sets (annualized and bonus).

Example: Bonus Tax Method with Payline One-Time Deductions (Single Tax Set Only)

In this scenario, the employee's deductions are likely to be based on a Deduction Subset, however, to simplify this example Benefit and General Deductions Taken is set to None on Paysheets/Paylines for the employee. This stops any deductions the employee is enrolled in from being taken. However, entries that you create for before-tax deductions for Plan Types 8x, 4x and 00 in Payline One-time Deductions, reduce Annual Taxable Income rather than Pay Period Taxable Income.

Note:

ALL (all Plan Types) before-tax deductions are treated as a reduction to Annual Taxable Income.

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

  • Regular pay period taxable earnings = 0.00 CAD

  • Bonus Tax Method taxable earnings = 15,000.00 CAD

  • Pay period taxable benefits (Benefit and General Deductions Taken were set to NONE) = 0.00 CAD

  • Pay period before-tax deductions (Benefit and General Deductions Taken were set to NONE) = 0.00 CAD

  • Pay Period Taxable Earnings are not applicable but the tax calculation process uses the employee's Job Record (Compensation) to derive a pay period taxable income. For this exercise, Pay Period earnings are 2,500.00 CAD and YTD Taxable Income is $40,000.00 with 10 pays remaining in the year, which includes the current pay period.

  • Annual Taxable Income = (Derived Pay Period Taxable Income 2,500.00 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 = 80,000.00 CAD

  • Payline One-time Deductions (before-tax, Plan Type 8x) = 7,250.00 CAD

  • Adjusted Annual Taxable Income = 72,750.00 CAD

The $72,750.00 is used in the tax calculation process, which includes the payment of the Bonus Tax Method earnings. When calculating the income taxes on the payment subject to the Bonus Tax Method, the system performs three tax calculations:

  • The regular annualized tax calculation, which in this case would produce zero taxes for the pay period.

  • An initial bonus tax calculation including the bonus payment.

  • The bonus tax calculation excluding the bonus payment where the net of these two bonus tax calculations is the income tax on the bonus payment that is set up to be taxed on the bonus tax method.

In the case of regular pay period deductions, if Taxable Benefits and/or before-Tax deductions were processed, multiple tax methods (Annualized and Bonus) would be applicable as a Pay Period Taxable Gross would have resulted. Because the Pay Period Taxable Gross would have been negligible, the results would have been distorted and likely inaccurate.

The same example can be applied using a deduction subset for the Benefits and General Deductions Taken fields on the paysheets/paylines. You can enter a deduction subset individually on paysheets/paylines or by creating an Off-Cycle Pay Calendar entry to generate paysheets/paylines with Benefits and General Deductions Taken set to Subset XXX for a pay run for bonus payments specific to the Bonus Tax Method.

The pay calculation process would be the same since the before-tax deductions (Plan Type 8x, 4x and 00) included in the SUBSET, reduce Annual Taxable Income.

Note:

Although Payline One-time Deductions is not used, with only the Bonus Tax Method applicable, ALL the before-tax deductions are treated as one-time reductions to Annual Taxable Income.