What is a Contractual Bonus?
A contractual bonus is paid out according to the terms of a contract of service and cannot be withdrawn by the employer without legal consequences.
Some examples are:
13th month payment or annual wage supplement; and
bonus paid under a "deferred bonus plan" or "retention bonus plan".
For contractual bonus, employees are entitled to such bonus in the year specified in the contract or bonus plan. This is usually the year in which you render service.
For most cases, bonus paid out are usually taxable contractual bonus. This means that when the employer's liability to pay bonus is contingent upon conditions to be met in the future, the employee is entitled to such bonus only when these conditions are met.
As an example - The employee is given a contractual bonus (e.g. 13th-month bonus) in the year ended 31 Dec 2022 as stated in the employment agreement. The employee will receive the bonus in Jan or Feb 2023.
Therefore, this contractual bonus will be taxable in Year of Assessment (YA) 2023 because the bonus was paid for the employee's services in 2022.
For such case in Talenox, you can use the Prior Year Bonus pay item to process in payroll.
In another scenario, if such bonuses are paid in advance before the conditions are met, the bonuses are taxable at the time of payment.
As an example - when an employer implemented a contractual bonus plan for the employees for the year ended 31 Dec 2022, the following conditions are set out in the employee's bonus plan:
The bonus will be paid on 31 Mar 2023; and
The bonus will not be paid to an employee who tenders his resignation before 31 Mar 2023.
When an employee gave notice of his/her resignation on 15 Jan 2023. he is not entitled to the bonus. The other employees are entitled to the bonus when they satisfy both conditions.
This contractual bonus will be taxable in Year of Assessment (YA) 2024 because the conditions were only met in 2023.
The above example also applies to employers who pay out bonus in 4 separate tranches in 2023 i.e. March 2023 (1st tranch), June 2023 (2nd tranch), September 2023 (3rd tranch) and November 2023 (4th tranch). In such case, this contractual bonus will be taxable in Year of Assessment (YA) 2024 because the conditions were only met in 2023.
Therefore in Talenox, you can use the Bonus pay item when processing payroll.