How do you calculate upfront PAYE for a bonus on monthly basis. The bonuses only get paid at the end of year but I want to deduct PAYE on a monthly bases for the bonus.
Here’s a tip you if you have never heard of it before. By paying the PAYE on your annual bonus upfront, you could receive your December bonus almost “tax free”!
How does it work?
Firstly, you need to estimate the bonus amount that will be due in December. Let’s use an example of an employee earning a salary of R25 000 per month and a travel allowance of R5000 per month. The bonus he is expecting to receive in December in addition to his salary and travel allowance would be R30 000.
Secondly, you must understand that a bonus is taxed as a once-off annual payment while the salary and travel allowance is taxed as regular payments. Therefore, we will need to perform two separate tax calculations to determine the amount of tax that should be deducted for the bonus payment.
Calculation 1 = determine the tax on the regular earnings.
Salary = R25 000
Travel Allowance = R5000
Taxable regular earnings = 25 000 + (5000*80%)
The total taxable regular earnings is therefore R29 000
To determine the correct marginal tax rate, we need to annualise the total taxable regular earnings
29 000 * 12 = R348 000
The marginal tax rate of annual earnings of R348 000 is 31%
The tax deductible for the year will be roughly R65 868
Calculation 2 = determine the tax on the regular and annual earnings combined.
In calculation 1, we determined that the taxable regular earnings is R348 000.
Add the annual taxable earnings of R30 000 to this amount to determine the combined value of R378 000
The marginal tax rate on the new annual earnings of R378 000 is still 31%
The tax deductible for the year will be roughly R75 168
The final step is to find the difference between the tax for the year on annual earnings including the annual bonus and tax for the year on taxable regular earnings.
R75 168 – R65 868 = R9 300
The tax deductible on the bonus only is therefore R9 300.
To deduct the amount upfront in monthly instalments, determine how many months are left before the bonus gets paid. In this case, the bonus is paid in December and payments will be made from March to November. Remember that the tax is due in the month in which the income is paid therefore you cannot deduct anything after the bonus is paid out.
R9 300 / 9 months = R1033
In this case, you can pay an additional amount of R1033 per month upfront to ensure that you receive a “tax free” bonus of R30 000 in December.