While bonus payments are often an eagerly anticipated year-end event, they can sometimes be deflating if we don’t understand taxation.
Luckily, tax on bonuses doesn’t need to be complicated. By quickly calculating our take-home bonus, you can make informed decisions about budgeting, financial goals, and potential tax implications.
In this article, we'll explore how taxes on your base salary and bonus amount are calculated so that you can calculate a proper bonus payout.
The taxes on bonuses are the same as if they were included in your basic salary. In Canada, bonuses are considered a taxable benefit and therefore are considered taxable income.
The tax rates, however, will vary depending on your Province or Territory. With the addition of the bonus to your salary, it is possible that part of your income will be taxed in the next tax bracket.
While we provide the tax bracket ranges in the article, we still recommend using a tax calculator (we’ll show you how below) so that you don’t have to calculate the tax on your bonus manually – saving you time.
To understand how bonus taxes are calculated, let's use an example.
For this example:
To quickly calculate the taxes, you'll want a simple tax calculator.
In our example, the base salary is $80,000. In the tax calculator, add this amount to the Employment Income field of the calculator.
On the right, you'll see the Federal and Provincial tax breakdown. Take note of these amounts.
In our example, we received a $10,000 bonus; add this to the $80,000 salary for a total of $90,000.
Next, enter this updated amount into the Employment Income field of the calculator. Again, take note of the updated Federal and Provincial tax amounts.
Next, subtract the total Federal + Provincial tax amounts in Step 1 from Step 2.
(Step 2 Federal + Provincial Tax) - (Step 1 Federal + Provincial Tax) = Estimated taxes to be paid on your bonus.
In our example: $18,421 - $15,448 = $2,973.00
We can expect to pay an estimated $2,973 on the bonus of $10,000. The $15,448 of taxes may have already been deducted from our paycheque, so we don't consider this for the taxed amount on the bonus.
This two-step calculation, one with and one without the bonus is called the Bonus Method. We also discuss the Periodic method (the method the CRA uses to calculate income tax source deductions) comparison in the same article. You may notice that the two methods follow a similar logical structure.
For reference, you can see the Federal and Provincial tax rates. Note the calculator you used previously already took these rates into account. You do not need to recalculate it again.
Newfoundland and Labrador
Prince Edward Island
Understanding how bonuses are taxed in Canada is important for employees seeking to optimize their earnings and avoid unexpected tax obligations.
Bonuses are taxed as income, with rates varying by province or territory. Employees can use the Bonus Method and a simple tax calculator to quickly calculate their tax liability on their base salary and bonus, helping them make informed decisions about their bonus payouts.
So, take the time to familiarize yourself with the process and use the provided examples to navigate bonus taxation with confidence.
If you’re an employer considering giving your organization a bonus, let us help you do it right! When it comes to payroll, our software was built specifically for HR professionals. Start a free trial today or request a personalized demo from our team.