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Canadian Bonus Tax

Wednesday, February 10, 2010

Canadian Bonus Tax

Question:

Hi, We are running PeopleSoft 9.0(using Payroll for North America) and PeopleTools 8.49. We ran a one time bonus that included only bonus earnings, NO regular earnings. We added an extra pay period in the Pay Calendar Table. My problem is I'm not understanding how PeopleSoft is calculating the Taxes. The earning code is setup with the Bonus Tax Method checked. Can someone please help me understand how PeopleSoft is calculating the taxes?

Answer:

This calculation method depends upon whether the bonus payment is included with the regular earnings (using the annualized tax method) or the bonus payment is paid on a separate cheque.


Bonus Included with Regular Earnings

When bonus is included with Regular Earnings (annualized tax method), in addition to the 3 Calculation Steps outlined, the first 2 Steps are to calculate pay period income taxes on the Regular Earnings using the Annualized Tax Method.



Calculation Step 1 – Determine annual taxes payable by annualizing the Regular Earnings


  • Calculation Input - The following will derive annual taxable gross: Regular Earnings X total pay periods in the year.
  • Calculation Output - Perform the annualized tax calculation to produce the annual income taxes.


Calculation Step 2 - Determine pay period income taxes for the Regular Earnings.



  • Calculation Input - The following will derive pay period income taxes: Annual income taxes (from Step 1) / total pay periods in the year.
  • Calculation Output - Pay period income taxes on the Regular Earnings.


The following table shows how the system calculates the tax payable when the bonus is included with regular earnings:




Calculation Step




Calculation Input




Calculation Output




1. Determine annual taxes payable using
annualized earnings including the bonus payment.




The following will derive annual taxable
gross:
(CIT taxable earnings gross year-to-date [YTD], including YTD bonus) + (current annualized tax method earnings ? no. of pays remaining in the year including the current period) + (current bonus payment)




Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.




2. Determine annual taxes payable using
annualized earnings excluding the current bonus payment.




The following will derive annual taxable gross: (CIT
taxable earnings gross YTD, including YTD bonus) + (current annualized tax method earnings ? no. of pays remaining in the year including the current period)




Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.



3. Determine pay period income taxes
payable on the bonus payment.



The following will derive pay period income taxes on the bonus payment: (Base Amount A – Base Amount B)



Pay period income ax payable on bonus
payment.



4. Determine pay period income taxes for
the Regular Earnings and the Bonus payment.



The following will derive pay period income taxes for both Regular Earnings and the Bonus payment: Pay period income
taxes on the Regular Earnings + Pay period income taxes on the Bonus payment



Total pay period income taxes for this
combined payment (cheque).




Bonus Paid on a Separate Cheque

This table shows how the system calculates the tax payable when the bonus is paid on a separate cheque with no regular earnings:



Calculation Step




Calculation Input




Calculation Output



1. Determine annual taxes payable based
on estimated annualized earnings including the bonus payment.



The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee’s Job Data record X No. of pay periods remaining
in the year including the current pay period)+ (current bonus payment)



Perform tax calculation and the result
will be annual income taxes which for this exercise will be Base Amount A.



2. Determine annual taxes payable based
on estimated annualized earnings excluding the current bonus payment.



The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) +
(pay period pay rate from the employee’s Job Data record X No. of

pay periods remaining in the year including the current pay period)



Perform
tax calculation and the result will be annual income taxes which for this
exercise will be Base Amount B.



3. Determine taxes payable on the bonus
payment.



(Base Amount A – Base Amount B)



Tax payable on bonus payment.




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