Bonus tax calculation
CRA's Employer Guide recommends various ways of calculating tax. As your Payroll Service provider, we follow the steps outlined in CRA's Payroll Deductions Formulas Computer Programs (T4127) to calculate income tax for special payments set up with the bonus tax options.
This corresponds to CRA's prescription for tax on non-periodic payments.
Another means of calculating bonus tax is with the Payroll Deductions Online Calculator (PDOC). This is an application to calculate payroll deductions for the most common pay periods, province (except Quebec provincial tax) and territory. The calculation is based on exact salary figures. The application can be used to either manually calculate the bonus tax or validate the T4127 results.
Note: This program requires a salary or wage to be recorded to calculate a bonus payment.
Important: Various factors affect the tax deduction results, some of which are difficult to replicate in this application. For example, a key step in determining the tax is to estimate the annual earnings. Therefore, if the current salary and benefit fields do not reflect an average per pay, the annual estimate will not be accurate.
To estimate the annual earnings, we use the employees YTD Taxable Earnings (TE) at the time of the bonus payment. Sometimes the TE does not reflect the employee's potential earnings. Example: For a new employee or for bonus’ paid early in a year where minimal or no other earnings have been paid, it will be necessary for the employer to manually calculate and override the tax by using a realistic annual to average pay period amount.
To review tax calculated for bonus’, process a payroll preview and review the tax deductions. Adjustments to tax can then be made prior to submission of the payroll for processing.
Please visit CRA's website to review the T4127 Guide to confirm the accuracy of the calculations or to verify the results through the PDOC.
To enter a one time tax override for an employee (if required), go to the Statutory Deductions page.