A little “something extra”: how to process bonus payments

Earlier this month, we shared an introductory overview of off-cycle payments (sometimes known as an “extra run” or “bonus run”) – a particularly hot topic at this time of year! But we get it: sometimes, a deeper dive is necessary… especially when it comes to legislative compliance.

If processing bonuses is top-of-mind for your organization right now, let’s get into some of the nitty-gritty details and how easy it can be when you’re using a payroll solution like Payworks’!

ICYMI: Here’s what we mean by a “bonus run”

A bonus run (also commonly referred to as an “extra run” or “off-cycle payment”) is simply an additional payroll run that falls outside of your organization’s regular pay periods for the year.

However, today we’ll be looking at “bonus runs” in their most literal sense: instances when an employer is performing an extra run to issue a bonus to staff (as opposed to making year-to-date adjustments around year-end or submitting remittances for manual payments – both common reasons for off-cycle payments).

Get up to speed here: https://blog.payworks.ca/a-little-something-extra-when-to-process-an-off-cycle-payment. 

Payworks pro tip: When processing an off-cycle payment using Payworks’ Payroll solution, clients have the option to categorize it as a “bonus run” and make payroll reporting easier for themselves down the line. We suggest choosing “bonus run” when issuing a yearly bonus, performance bonus, or a profit-based bonus payment, as examples.

Vacation pay, deductions and benefits, and statutory deductions– and more importantly, how they apply to bonus payments

In order to determine whether vacation pay is applicable to a bonus payment, it’s first important to identify what type of bonus is being paid out. Whether or not vacation pay is calculated on a bonus depends on whether the bonus is classified as discretionary or work-related.

In the latter case, it’s known as a vacationable earning. Across all jurisdictions in Canada, vacation pay is calculated on bonuses that are work-related, such as those based off hours of work or those which are non-discretionary. Vacation pay is not calculated on bonuses that are discretionary, such as those unrelated to performance. Based on this, if you’ve determined that vacation pay is applicable, ensure vacation entitlement is applied to those earnings.

Payworks pro tip: Vacation pay on bonuses can either be accrued or paid out alongside the bonus – the latter of which makes it easier for both the employer and employee to manage and track the year’s total vacation accrual.

Payworks pro tip: You can find a consolidated chart of vacationable earnings (which includes bonuses), broken down by province/territory, by downloading a FREE copy of the Payworks Payroll Guide.

Deductions and benefits refer to withholdings from an employee’s pay that are unique to the company (such as pension plan/RRSP and social fund contributions, or employee-paid portions of the benefit plan). These deductions are typically spread out across the number of pay periods in the year. If that’s the case for your organization’s payroll, these wouldn’t be applied to the bonus run, as it’s outside the number of set pay periods for the year.

However, there can be an exception for union dues, as union due calculations are dependent upon the unique union agreement. If union dues are applicable to your payroll, check how they’re are calculated (whether as a percentage of earnings or hours worked) and proceed accordingly.

Statutory deductions refer to withholdings from an employee’s pay that are legislatively required by a governing body – such as Canadian Pension Plan (CPP), Québec Pension Plan (QPP), Employment Insurance (EI), and income tax deductions. When processing a bonus run, statutory deductions apply!

“The Bonus Tax Method”

The application of statutory deductions is already part of your regular payroll process, but when issuing bonuses, it’s important to note that the actual calculation can differ from the norm – and that this can also apply to retroactive pay, stock option taxable benefits, outstanding vacation paid out to a departing employee, as well as additional/unusual amounts.

This is commonly referred to as the “The Bonus Tax Method” and it’s important for organizations issuing bonus payments to be able to identify the payments which require it, be able to calculate it, and also answer employee questions about it.

According to the National Payroll Institute (NPI), a bonus payment can often result in the employee being bumped into a higher income bracket – thereby increasing the rate at which they would have been paying income tax since the beginning of the tax year. And the Canada Revenue Agency (CRA) and Revenu Québec (RQ) require employers to collect the difference between the pro-rated income tax (the statutory deductions on the regular salary) and the employee’s total annual salary including their bonus (or bonuses – if an employee is paid more than one bonus in the tax year, statutory deduction calculations must take into account all bonuses paid, as these calculations are annualized).

“For example, an employee receiving an annual salary of $50,000 per year in addition to a bonus payment of $10,000 will be taxed on $60,000 per year when they file their personal income tax return at the end of the year,” reads NPI’s website. “The employee’s income tax deductions each pay period, however, are only calculated based on an annual salary of $50,000. With a bonus payment, the payroll system is required to recalculate the employee’s taxes based on $60,000 and then calculate the difference between the income taxes the employee pays on a regular basis and the employee’s newly revised salary which has been increased by $10,000 for the entire year.”

So – how can you manage this? One of the simplest ways is to deduct the difference from the bonus payment.

Payworks pro tip: Because calculating statutory deductions for a bonus payment can be more complex than your day-to-day payroll calculations, processing them through a payroll solution like Payworks’ can help to alleviate concerns and ensure accuracy!

To learn more about the Bonus Tax Method, visit https://payroll.ca/payroll-infoline.

Allocating bonus payments to pension plans/RRSPs

When issuing bonuses to your organization, an employee might request that you allocate that payment into their pension plan/RRSP. Such a request is not uncommon, especially if those additional earnings could affect the recipient’s income tax bracket. What’s important to know is that the bonus is considered pre-taxed earnings, and allocating them to a pension plan/RRSP doesn’t change the fact that those statutory deductions mentioned above continue to apply.

Payworks pro tip: As bonuses are generally a one-time payment, a best practice recommended by our in-house experts is to obtain written consent from the employee indicating that they wish to allocate their bonus into their pension plan/RRSP. Payworks’ Human Resources solution can enable our clients to do just that by circulating important documents to employees through our Company Documents feature (where staff can provide digital acknowledgement of the documents). These forms can be saved in the Employee Profile management system, which acts as a digital “file folder” to house records for each staff member.

8 simple steps to issue a bonus payment using Payworks’ Payroll solution

Each of the eight steps to issue a bonus payment are one-liners – it doesn’t get much simpler than that!

Payworks pro tip: When performing a bonus run, ensure you have all of the information required to process the run gathered beforehand – you can find that here: https://blog.payworks.ca/a-little-something-extra-when-to-process-an-off-cycle-payment. 

Navigate to Payroll > Company Setup > Company Info > Run Schedule and see how easy processing a bonus run can be using Payworks’ Payroll solution:

1. Obtain the approved bonus values from the proper authority at your organization.
2. Determine the date on which the bonus is to be paid out.

Payworks pro tip: The payment date will define the processing date (which is important for your remittances and year-end processing!).

3. Choose the method by which the bonus will be received (direct deposit or cheque).
4. Choose when the corresponding pay statement will be issued.
5. Enter/import the bonus payment data into the pay grid.

Payworks pro tip: It’s possible to manually key the bonus payroll data into the Payworks system; however, this can be time consuming. Instead, easily import the data into our system by simply exporting the payroll grid (creating a workbook in Microsoft Excel), populating the bonus line items, and importing the CSV file back into Payworks!

6. Run the payroll preview (you can do this as many times as you’d like at no extra charge!).
7. Review the payroll report.
8. Process!

We get it: processing a bonus run falls outside of your regular payroll routine! Whether it’s your first time processing bonuses using the Payworks system or you haven’t performed this task since last year, you can always email or call your dedicated Client Service Representative (CSR) for assistance. There are also great resources, like the “Extra or Bonus Payroll Runs” details, located in our Help Centre and available for our clients to reference at any time. Simply put, we’re the payroll experts so you don’t have to be. Learn more: https://www.payworks.ca/landing-pages/product/payroll.