From Jan 1st, 2019 to 31st Dec 2021, China tax residents are able to choose two different methods for calculating the individual income tax (IIT) for annual bonuses. Both Chinese employees and expatriates who receive an annual bonus are encouraged to consider their options in order to minimize their individual income tax payable. We created a China annual bonus tax calculator to figure our which policy is preferential to you so you can effectively reduce you tax liability.
The transition policies of preferential tax treatments after the amendments to China Individual Income Tax Law announced on Dec 27th, 2018 (Caishui [2018] No. 164), introduced the transition policies for calculating individual income tax on annual bonuses. Together with the recent changes to income tax deductions for foreigners, the previous preferential tax policy for calculating IIT for annual bonuses will be transitioned out over a 3-year period (ending on Dec 31st, 2021). During this transition period, China tax residents may choose to apply either of the following options.
Option 1: Applying the One-Time Preferential Tax Treatment
Since 2005 China taxpayers have enjoyed preferential tax treatment for annual bonuses according to SAT [2005] No. 9. This preferential policy allows annual bonuses to be calculated separately from your salary by dividing the annual bonus by 12 in order to apply a lower applicable tax rate. However, this preferential tax treatment can only be utilized once per year after which any monthly bonuses, quarterly bonuses or other performance bonuses you might receive will be taxed together with your salary and other income.
Below is the formula and applicable tax rates used to the calculate IIT liability from annual bonuses using the one-time preferential tax treatment policy;
(One-off Annual Bonus) x (Applicable tax rate*) – (Quick deduction) = (Tax liability for annual bonus)
*Applicable tax rate is found by dividing the One-off annual bonus by 12 and using the below tax table.
Example: If you receive a one-off annual bonus of RMB 100k in 2019, your applicable tax rate is at level 2 (100k/12 = 8,333) at a tax rate of 10% and 210rmb of quick deduction amount. The total tax liability of the annual one-off bonus is as follows.
100,000 x 10% – 210 = 9,790
Applying the preferential tax treatment for one-off annual bonuses is only valid until December 31st, 2021 when it will be replaced by Option 2, a single Comprehensive Income Tax policy.
Option 2: Applying the Comprehensive Income Tax Policy
Effective on January 1st, 2019, China tax residents can choose to apply the new method of calculating IIT for annual bonuses. This method of calculating IIT liability combines your annual gross salary with all bonuses which you have received, into a comprehensive annual income.
Below is the formula and applicable tax rates tables for calculating IIT liability from annual total income using the comprehensive income tax policy;
(Annual Gross Salary + Gross bonuses received) x Applicable tax rate – Quick Deduction = Tax Liability for total annual income
The comprehensive income tax policy may be preferential in some situations, but not others, depending on the relationship between the gross salary and annual bonuses received. China tax residents can choose to apply the Comprehensive Income Tax policy instead of the one-time preferential tax treatment policy during the 3-year transition period, after which only the comprehensive income tax policy will be available. Below are some scenarios of IIT calculations using both options.
Note: The above calculation does not consider the various deductions except the standard deduction of RMB 60K/annum. The IIT would be lower if including various deductions including social securities’ deductions, additional itemized deductions, and other qualified deductions per new IIT law. Please use our China annual bonus tax calculator for a more accurate calculation.
China Annual Bonus Tax Calculator (English & Chinese)
We created a tax calculator to help China tax residents identify which policy for annual bonus tax calculation will be preferential to them. Follow the instructions below to receive the China annual bonus tax calculator. Available in both English & Chinese.
How to use the annual bonus tax calculator:
The calculator requires you to put in your gross annual figures for; salary, one-off annual bonus, Social Security deductions, additional itemized deductions, and other qualified deductions.
Annual gross salary
In this field, you should input your gross annual salary before any taxes and deductions. Do not include any non-taxable allowances for expatriate; i.e. housing, meal, children’s education, flights to home country etc.
Annual bonus (one-off)
In this field, you should input the amount of your one-off annual bonus. If you receive multiple bonuses throughout the year, you may input the highest single bonus received here, and the others should be included in your annual gross salary.
Social security deductions
The compulsory individual social security payments deducted from your salary should be input here. Do not include the social security payment made by your employer.
Additional itemized deductions
Input any qualified additional itemized deduction amounts here. Additional itemized deductions include; Housing rental, mortgage interest rates, children’s education, expenditure on dependent parents, continuing education expenses and healthcare costs. Click here to read more about additional itemized deductions.
Other qualified deductions (if any)
Such as qualified commercial medical insurance, qualified donations to non-profitable organization etc., according to China IIT regulations.
