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How is Bonus Treated on the Payroll?

“How is tax on bonuses computed?” is a frequently asked question. This article discusses how we treat bonus taxes in a payroll computation.

What is a Bonus?

Bonus is an incentive pay given on top of the employee’s usual compensation (basic salary).

Types of Bonus

In our work as an outsourced payroll service provider, we see all kinds of bonuses. The common types include performance bonus, long service bonus, monthly bonus, annual bonus. It is up to the employer to decide the type of bonus and the basis on which to grant it.

Whatever the name of the bonus pays, and whatever the reason for giving it, the law treats it as a bonus for tax purpose.

How Much Bonus Should an Employer Pay?

This is at the discretion of the employer. The law does not stipulate how much bonus an employer can pay.

Is Bonus Added to Gross Earnings to Calculate Chargeable Income?

Where the bonus amount is within the threshold permitted by law, it is not added to your gross earning. The tax rate for bonus up to 15% of the employee’s salary is 5%. This tax is a final tax.

Where the bonus amount exceeds the 15% threshold, we add the excess amount to the gross earnings to determine chargeable income and tax it at regular tax rates.

How is Bonus Tax Computed?

  • The tax rate for bonuses up to 15% of the employee’s annual basic salary is 5%. The tax on this bonus is a final tax, meaning that we will not add the bonus to gross earning to compute the employee’s tax.
  • When the bonus amount earned for the year is over 15% of the employee’s annual basic salary, 15% of the employee’s annual basic salary is taxed at a rate of 5%, and the excess amount is added to the employee’s chargeable income and taxed at normal rates.

Example 1

Ernest earns an annual basic salary of GHS18,000.00, and his employer pays him a performance bonus of GHS 700.00 for the year.

  • His annual basic salary is GHS18,000.00.
  • 15% of annual basic salary is GHS2,700.00 (GHS18,000*15%).

The bonus of GHS 700 is less than the allowed threshold of GHS2,700, so the bonus tax is GHS 35.00 (GHS700*5% = GHS 35.00). This tax is a final tax and as the bonus is within the threshold, it will not be added it to his normal pay to determine chargeable income.

 

Example 2

Bill earns an annual basic salary of GHS12,000.00 and a bonus of GHS 5,000.00.

  • His annual basic is GHS 12,000.00, so the threshold for bonus tax which is 15% of annual basic salary is GHS1,800.00 (GHS12,000.00 x 15%). The bonus tax on this is GHS 90.00 (GHS1,8000 x 5%)
  • The bonus over his limit is GHS 3,200 (GHS5,000.00-GHS1,800.00).

The excess amount of GHS 3,200 is added to Bill’s chargeable income and taxed at the applicable rates.

Conclusion

The tax rate for a bonus that is up to 15% of annual basic salary is 5%. This tax is a final tax.

Where the bonus paid is over the 15% of annual salary limit, the portion of the bonus that exceeds 15% of annual salary is added to gross earnings and taxed at the normal tax rates.

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