The difference between a thirteenth cheque and a performance bonus is clear but many employees aren’t aware that there’s a difference.
A thirteenth cheque is an additional monthly salary or 8.33% of the employee’s annual salary that’s usually paid in December.
A performance bonus is based on an employee’s performance and is subject to the employer’s conditions stipulated by their contract of employment.
Tax provisions and considerations for thirteenth cheques
A bonus becomes part of an employees total taxable income for the year and may impact their tax bracket.
If a contract of employment specifies that an employee will receive a thirteenth cheque, then monthly contributions can be made as part of their salary deductions to offset the tax implications of their bonus.
Because it’s stipulated in the contract of employment, a thirteenth cheque is a guaranteed extra amount that your employee needs to make provision for. To reduce the tax implication in December, your payroll department can adjust employees’ monthly contributions so that they can enjoy their bonuses in full in December.
Do your employees understand their annual bonus?
For performance bonuses, it’s not possible to anticipate how much to provide for tax because the bonus is discretionary, seldom guaranteed, and can’t be relied on based on having received a performance bonus in the past.
Rewarding performance
These days, there’s a greater shift towards performance bonuses rather than thirteenth cheques for several reasons:
- Performance bonuses are more motivating for employees
- Bonuses can be determined on company performed in the past financial year
- They reduce the sense of entitlement about bonuses
- They allow companies to consider financial performance before bonuses are paid
Whatever route you choose, take the time to explain the different types of bonuses to your employees and the tax implications as a result.