Christmas Bonus: Correct Taxation and Declaration
Christmas Bonus: Correct Taxation and Declaration
As the most wonderful time of the year – Christmas – approaches, it's a time we spend with our loved ones, be they family, friends, or colleagues. But it is also the time, where we must plan and arrange our finances every year, because we want to give gifts to those we hold dear. A benefit increasingly offered by many employers today – the Christmas bonus – can help ease financial constraints.
The bonus can be a one-time cash deposit (monetary) or an experience (non-monetary). It can also be an internal recognition or a job promotion. In the following article, we outline whether and how to declare Christmas bonuses and if these should be considered in the calculation of subsequent vacation and sickness pay (i.e., vacation/sickness benefits payable in the next 6 months).
A cash bonus is treated like regular wages. Thus, when an employer decides to pay a Christmas bonus, all mandatory labour taxes must be calculated and paid on this amount, and the bonus must be declared monthly on form TSD annex 1 (or 2, in case the employee is a non-resident). Bringing out, that it's not mandatory to include the Christmas bonus in the calculation of the employees' 6-month average base amounts, as the bonus is not related to one’s job performance but is a one-time financial gratitude from the employer. However, including it in the 6-month average wages is not prohibited and would make the calculation of vacation and sickness benefits more favourable for the employee. Therefore, it's up to the employer to decide whether to apply this more advantageous option.
Example:
A company decides to pay a Christmas bonus of €69 net. The table below shows two scenarios: with and without an income tax free minimum (hereinafter basic exemption) and both considering the employee's enrollment in the second pillar of pension.
Handling an experience (or other non-monetary bonuses) is more complex as it is taxed as a fringe benefit.
Suppose an employer wants to gift each employee a theatre experience instead of a cash bonus, offering tickets to a ballet at the National Theatre Estonia, each costing €69. The employer must calculate and pay corporate income tax of 20/80 on the ticket's price (€69 * 20/80 = €17.25) and social security on the gross benefit amount, which is €86.25 (€69 + €17.25) (33% of €86.25 = €28.46). The total cost to the employer per bonus-ticket would be €69 + €17.25 + €28.46 = €114.71. As it's a fringe benefit, it must be declared monthly on form TSD annex 4 (the taxation period is the calendar month). More detailed information on fringe benefits can be found on the EMTA website.
The bonus is a benefit offered by the employer, and I believe that everyone who receives it, in any form, feels valued. BDO's payroll team regularly deals with various bonuses, with accounting principles tailored to client-specific needs. If you have questions about (Christmas) bonuses or payroll accounting and outsourcing services in general, we're here to help. Contact us!
A cash bonus is treated like regular wages. Thus, when an employer decides to pay a Christmas bonus, all mandatory labour taxes must be calculated and paid on this amount, and the bonus must be declared monthly on form TSD annex 1 (or 2, in case the employee is a non-resident). Bringing out, that it's not mandatory to include the Christmas bonus in the calculation of the employees' 6-month average base amounts, as the bonus is not related to one’s job performance but is a one-time financial gratitude from the employer. However, including it in the 6-month average wages is not prohibited and would make the calculation of vacation and sickness benefits more favourable for the employee. Therefore, it's up to the employer to decide whether to apply this more advantageous option.
Example:
A company decides to pay a Christmas bonus of €69 net. The table below shows two scenarios: with and without an income tax free minimum (hereinafter basic exemption) and both considering the employee's enrollment in the second pillar of pension.
| Christmas Bonus (Based on a min. basic exemption of €654) | Christmas Bonus (Not considering basic exemption, i.e., €0) |
| Net: €69 | Net: €69 |
| Income Tax: €0 | Income Tax: €17.25 |
| Employee Unemployment Insurance: €1.15 | Employee Unemployment Insurance: €1.43 |
| Pension Contribution: €1.43 | Pension Contribution: €1.79 |
| Gross: €71.58 | Gross: €89.47 |
| Social Security: €23.62 | Social Security: €29.53 |
| Employer Unemployment Insurance: €0.57 | Employer Unemployment Insurance: €0.72 |
| Employer Total Cost: €95.77 | Employer Total Cost: €119.72 |
Handling an experience (or other non-monetary bonuses) is more complex as it is taxed as a fringe benefit.
Suppose an employer wants to gift each employee a theatre experience instead of a cash bonus, offering tickets to a ballet at the National Theatre Estonia, each costing €69. The employer must calculate and pay corporate income tax of 20/80 on the ticket's price (€69 * 20/80 = €17.25) and social security on the gross benefit amount, which is €86.25 (€69 + €17.25) (33% of €86.25 = €28.46). The total cost to the employer per bonus-ticket would be €69 + €17.25 + €28.46 = €114.71. As it's a fringe benefit, it must be declared monthly on form TSD annex 4 (the taxation period is the calendar month). More detailed information on fringe benefits can be found on the EMTA website.
The bonus is a benefit offered by the employer, and I believe that everyone who receives it, in any form, feels valued. BDO's payroll team regularly deals with various bonuses, with accounting principles tailored to client-specific needs. If you have questions about (Christmas) bonuses or payroll accounting and outsourcing services in general, we're here to help. Contact us!