How to Calculate IIT on End-of-Year Bonuses in China

When the calendar year or the Chinese lunar year draws near, many companies in the Mainland pay an annual bonus to their workforce as a way of rewarding them before the official holiday schedule and workers go on trips back to their hometowns.

Given the cultural and social importance attached to this corporate benefit in Chinese jurisdictions, the calculation of individual income tax (IIT) for these amounts differs from the usual monthly instalments companies deduct on behalf of their employees.

The Hawksford HR Service Team has drafted the ultimate guide to analysing the formulas used to calculate IIT on annual bonuses, maximising your employees' net income, and presenting practical examples of applying these principles.

In 2018, the Ministry of Finance and the State Administration of Taxation issued the so-called Notice Concerning the Connection of Preferential Policies After the Individual Income Tax Law Is Amended (No. 164 [2018] MOF). According to the notice, a resident individual’s one-time annual bonus shall not be included in the yearly comprehensive income calculation until 31 December 2021.

However, this prescription can be ignored if the actual tax payable resulting from a complete analysis is lower than what it could be under the new rules. The tax rate is defined by dividing the employee’s one-time annual bonus into 12 months and using the applicable tax rate and a quick deduction related to the corresponding range defined by the tax laws.

The formula is as follows:

Tax payable on year-end bonus＝One-time annual bonus taxable income × Applicable tax rate - Quick deduction

From 1 January 2022, the one-time annual bonus obtained by a resident individual has to be included in the yearly comprehensive income for IIT calculation and declaration.

Methods of Calculating IIT on One-Time Annual Bonuses

The notice mentioned above implies two ways of calculating IIT on gross one-time annual bonuses before 31 December 2021:

Combining the one-time annual bonuses with yearly comprehensive income
Considering the one-time annual bonuses as an independent source of income

It is hard to say which one is more tax-efficient because the reality varies from each case. However, the rules summarised below may give you some tips.

If the total amount of taxable yearly comprehensive income is lower than zero (*), then the one-time year-end bonus tax impact shall be determined from its inclusion into the employee’s annual comprehensive income to enjoy a more favourable payment in terms of IIT.
If the total amount of taxable annual comprehensive income is higher than zero, and, after adding the annual bonus, the total is even higher than CNY 36,000, then the tax impact shall be calculated using both methods to compare the results and choose the more reasonable scenario.

(*) This may happen when the yearly comprehensive income is lower than the yearly total deductions

We shall list two examples below to facilitate understanding.

Example 1:

Employee A

Annual income: CNY 180,000

Monthly social insurance and housing fund paid by Employee A: CNY 4,900

Monthly fixed deduction: CNY 5,000

Monthly special deduction: CNY 2,200

Year-end bonus: CNY 150,000

Option 1: Combine the bonus with yearly comprehensive income

Amount of annual accumulated taxable income:

(180,000/12 months - 5,000 - 4,900 - 2,200) x 12 months + 150,000 = CNY 184,800

Progressive Tax Bracket	Amount of Accumulated Taxable Income (X) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	≤ 36,000	3	0
2	36,000 < X ≤ 144,000	10	2,520
3	144,000 < X ≤ 300,000	20	16,920
4	300,000 < X ≤ 420,000	25	31,920
5	420,000 < X ≤ 660,000	30	52,920
6	660,000 < X ≤ 960,000	35	85,920
7	> 960,000	45	181,920

Total annual IIT: 184,800 x 20% - 16,920 = CNY 20,040

Option 2: Consider the one-time annual bonus as an independent source of income

Amount of monthly accumulated taxable income:

150,000/12 months = CNY 12,500

Progressive Tax Bracket	Amount of Monthly Taxable Income (Y) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	Y ≤ 3,000	3	0
2	3,000 < Y ≤ 12,000	10	210
3	12,000 < Y ≤ 25,000	20	1,410
4	25,000 < Y ≤ 35,000	25	2,660
5	35,000 < Y ≤ 55,000	30	4,410
6	55,000 < Y≤ 80,000	35	7,160
7	Y >80,000	45	15,160

Annual bonus IIT: 150,000 x 20% - 1,410 = CNY 28,590

Amount of annual accumulated salary taxable income:

[(180,000/12-5,000-4,900-2,200)] x 12 months = CNY 34,800

Progressive Tax Bracket	Amount of Accumulated Taxable Income (X) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	X ≤ 36,000	3	0
2	36,000 < X ≤ 144,000	10	2,520
3	144,000 < X ≤ 300,000	20	16,920
4	300,000 < X ≤ 420,000	25	31,920
5	420,000 < X ≤ 660,000	30	52,920
6	660,000 < X ≤ 960,000	35	85,920
7	X > 960,000	45	181,920

Annual salary IIT: 34,800 x 3%-0 = CNY 1,044

Total annual IIT: 28,590 (annual bonus IIT) + 1,044 (annual salary IIT) = CNY 29,634

Conclusion:

The difference between the two tax payables is CNY 9,594, resulting in a clear incentive to include Employee A’s year-end bonus into their cumulative income for the year.

Example 2:

Employee B

Annual income: CNY 240,000

Monthly social insurance and housing fund paid by Employee B: CNY 4,900

Monthly fixed deduction: CNY 5,000

Monthly special deduction: CNY 0

Year-end bonus: CNY 144,000

Option 1: Combine the bonus with yearly comprehensive income

Progressive Tax Bracket	Amount of Accumulated Taxable Income (X) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	X ≤ 36,000	3	0
2	36,000 < X ≤ 144,000	10	2,520
3	144,000 < X ≤ 300,000	20	16,920
4	300,000 < X ≤ 420,000	25	31,920
5	420,000 < X ≤ 660,000	30	52,920
6	660,000 < X ≤ 960,000	35	85,920
7	X > 960,000	45	181,920

Amount of annual accumulated taxable income:

(240,000/12 months - 5,000 - 4,900) x 12 months + 144,000 = CNY 265,200

Total annual IIT: 265,000 x 20% - 16,920 = CNY 36,120

Option 2: Consider the annual bonus as an independent source of income

Amount of monthly accumulated taxable income:

144,000/12 months = CNY 12,000

Progressive Tax Bracket	Amount of Monthly Taxable Income (Y) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	Y ≤ 3,000	3	0
2	3,000 < Y ≤ 12,000	10	210
3	12,000 < Y ≤ 25,000	20	1,410
4	25,000 < Y ≤ 35,000	25	2,660
5	35,000 < Y ≤ 55,000	30	4,410
6	55,000 < Y≤ 80,000	35	7,160
7	Y >80,000	45	15,160

Annual bonus IIT: 144,000 x 10% - 210 = CNY 14,190

Amount of annual accumulated salary taxable income:

(240,000/12 months - 5,000 - 4,900) x 12 months = CNY 121,200

Annual salary IIT: (121,200 x 10% - 2,520) = CNY 9,600

Total annual IIT: 14,190 (annual bonus IIT) + 9,600 (annual salary IIT) = CNY 23,790

Conclusion:

The difference between the two tax payables is CNY 12,330, so in this case, Employee B clearly benefits if their year-end bonus is considered as an independent source of income.

Tax Payables Gaps Caused by a Difference of Just One Yuan

Sometimes, a discrepancy in wages of just one yuan can cause a huge difference in terms of IIT payable as the applicable tax rate could fall under a higher bracket defined by the tax laws. Employers and HR staff should pay close attention to numbers hovering around each progressive tax bracket threshold if they want their employees to enjoy the highest net income after IIT deduction.

For example:

Employee C receives CNY 36,000 for a one-time year-end bonus while Employee D receives CNY 36,001.

Progressive Tax Bracket	Amount of Monthly Taxable Income (Y) (CNY)	Tax Rate (%)	Quick Deduction (CNY)
1	Y ≤ 3,000	3	0
2	3,000 < Y ≤ 12,000	10	210
3	12,000 < Y ≤ 25,000	20	1,410
4	25,000 < Y ≤ 35,000	25	2,660
5	35,000 < Y ≤ 55,000	30	4,410
6	55,000 < Y≤ 80,000	35	7,160
7	Y >80,000	45	15,160

Employee C:

CNY 36,000/12 months = CNY 3,000

Applicable tax rate: 3%

IIT payable on year-end bonus: CNY 36,000 × 3% = CNY 1,080

Employee D:

CNY 36,001/12 months = CNY 3,000.08

Applicable tax rate: 10%

IIT payable on year-end bonus after quick deduction: CNY 36,001 × 10% - 210 = CNY 3,390.10

In this case, although there is only one yuan difference in the year-end bonus between the two colleagues, Employee D will end up paying CNY 2,309.10 more in income tax than Employee C and will receive a lower net amount while the company cost remains the same.

Conclusion

From the examples listed above, we can see that calculating the year-end bonus can be challenging and complicated, especially for foreign companies in China. Not only should your HR team aim to maximise your employees’ net income through their year-end bonuses, but they should also ensure that the balance between monthly salary and year-end payments remains consistent and reasonable with regard to tax.

How Can Hawksford Help?

Hawksford has over ten years’ experience in providing HR and payroll management services and solutions. Our skilled team of experts based in five locations (Shanghai, Beijing, Guangzhou, Suzhou and Shenzhen) in mainland China can provide international companies, SMEs and other types of businesses with professional outsourced services including year-end bonus calculation. We also provide the following compensation and benefits services:

Payroll and labour cost calculation
Handling the employee benefits for your company
Helping to draft or review HR and labour documents such as your company’s handbook
Advice on HR management, such as onboarding, training and separation
Providing solutions regarding employee relationship issues

With local knowledge, a robust administration framework and international client experience, we are confident we can guide our clients through the steps to successfully operate their businesses in China.