How to Tax as Bonus
What is the “Tax as Bonus” flag on the payroll category setup, what does it do and how does it work?
In order to understand how the “tax as bonus” category works you must first understand how a regular category is taxed.
Clarity uses what is called a “pro-rated tax formula” for calculating taxes. Clarity taxes the amount of your regular wages, multiplies it by the number of payrolls in the year, determines the tax bracket, calculates taxes on that value, divides those taxes by the number of pays in the year, and there is your per pay tax amount. A visual of the formula is below.
((Wages * pays in year) * tax rate) / pays in year
Example of employee getting 5000 per pay on monthly payroll.** (tax rate is fictional)
((5000 * 12) * 0.25) / 12 = $1250.00 tax per pay
Since a bonus payment is irregular, we would not want the system to assume it is being paid on every payroll for the entire year (e.g.: Do not pro-rate it) so what the tax as bonus does is add amount of the bonus to the formula after it has calculated the estimated annual gross wages.
((Wages * pays in year + BONUS) * tax rate) / pays in year
Example of above employee getting a 5000 bonus
((5000 * 12 + 6500) * 0.25) / 12 = 1385.42 tax per pay
The above formula has been simplified to easily explain how this works.
Potential Issues:
Q) I have a category set “Tax as Bonus” but no taxes are coming out, why?
A) If the bonus is entered into a payroll where there are NO REGULAR PAGES present then the Clarity software does not have regular wages to use in the calculation of the bonus. Therefore the annual tax is being calculated ONLY on the bonus amount. Do not forget, 99% of the time your bonus payments will likely be BELOW the employees annual tax credits and therefore the system sees this as the employee owing no taxes.
Bonus payments must be made to a payroll period where:
REGULAR WAGES HAVE ALREADY BEEN PAID TO THE EMPLOYEE; or
REGULAR WAGES ARE ALSO BEING PAID AT THE SAME TIME.
Q) I have a category paid as Bonus and the taxes are coming out way to high, why?
A) Similar to the above question, however, because the employee has no regular wages categories included in the payroll that you have choosen to do payroll for (example: you normally pay the employee “Salary” but have removed it from the “active categories” in the payroll you are running) the system has no details on the regular payroll. The Clarity software will then assume you’ve made an error and treat the bonus category as a “regular” payment type, ignoring the “tax as bonus” flag.
