Calculating Individual Income Tax on Annual Bonus in China

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Dec. 9 – 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 and 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). This number would be the basis for determining the applicable IIT rate payable on the bonus.

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:

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice and specifics relating to individual income tax in China, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

This article is also available on Dezan Shira & Associates’ online business resource library. To view the article, and other regulatory updates, please click here.

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2 thoughts on “Calculating Individual Income Tax on Annual Bonus in China

    James says:

    I don’t think this is correct. There are 2 mistakes: the tax rate on 420,001 is 30% not 35%, and the quick deduction amount should be multiplied by 12. Therefore, in your example:

    A’s IIT on the lump-sum annual bonus = RMB420,000 x 25% – RMB1,005*12 = RMB 92,940
    B’s IIT on the lump sum annual bonus = RMB420,001 x 30% – RMB 2,755*12 = RMB 92,940.3

    Annual bonuses are taxed as if they are accrued evenly throughout the year.

    Nicholas says:

    @James: thanks for the comment. As this article is now over two years old, some information may be outdated. We’ll work towards updating it as soon as we can.

    All the best,
    Nicholas

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