Calculating Individual Income Tax on Annual Bonus in China

As the year’s end is approaching, many companies in China are poised to give out annual bonuses. However, when contemplating the appropriate bonus amount, employers should pay close attention to the calculation of individual income tax (IIT) on bonuses. The State Administration of Taxation’s announcement No.9 issued in 2005 (guoshuifa [2005] No.9) provides for the method of calculating IIT on lump-sum annual bonuses as follows (assuming that the individual’s monthly salary is higher than the IIT exemption threshold):

• IIT on lump-sum annual bonus = (lump-sum annual bonus x monthly IIT rate applicable to 1/12 of lump-sum annual bonus) – corresponding monthly quick deduction

Based on the formula above, employers should divide the lump sum annual bonus amount by 12. This number would be the basis for determining the applicable IIT rate payable on the bonus. Pay attention to numbers that hover around the threshold values at each progressive tax rate level (shown in the IIT Rates and Deductions table below) as going over the threshold by as little as RMB 1 can trigger a huge difference in the post-IIT amount.

To illustrate, if a senior manager “A” receives an annual bonus of RMB420,000, and another senior manager “B” receives a total of RMB420,001, the IIT rate of 25 percent is applicable to A’s bonus (RMB35,000 x 12 months), while the IIT rate of 30 percent is applicable to B’s bonus (RMB35,000.08 x 12 months). Therefore:

• A’s IIT on the lump-sum annual bonus = RMB420,000 x 25% – RMB1,005 = RMB103,995.00
• B’s IIT on the lump sum annual bonus = RMB420,001 x 35% – RMB 2,755 = RMB123,245.30

In the example above, B’s annual bonus was only RMB1 more than A’s, but the total bonus income that ultimately goes to B’s pocket is RMB19,250.30 less than A’s. The relevant comparisons are shown in the table below: