Bonus processing : A comprehensive guide

Bonuses are more than just a year-end highlight for employees—they’re an opportunity for employers to boost morale and show appreciation. When processed correctly, bonuses can also build employee trust while keeping your business compliant with tax regulations. This guide walks you through everything from setting up bonus transactions to understanding tax-free thresholds, and ensuring your bonus processing runs smoothly.

What Is an Annual Bonus?

An annual bonus is typically paid at the end of the tax year and takes into account the tax-free bonus threshold. This threshold, announced annually as part of the Minister of Finance’s budget, represents the portion of the bonus exempt from taxation. In 2024, the tax-free threshold is USD 700.

Steps for Processing Bonuses

1. Setting Up a Bonus Transaction Code

To process bonuses accurately, start by confirming whether a transaction code for bonuses already exists in your payroll if it doesn’t, create one under the category Earnings—Bonus. This step ensures the bonus is properly classified in payroll calculations, including the tax-free portion.

Here’s how to create the bonus transaction code:

1. Go to: Edit > Transaction Codes.
2. Click Insert and select the category Earnings – Bonus.
3. Assign a unique codeand a descriptive name.
4. Verify the Tax-Free Bonus settings to reflect the current threshold (USD 700).
5. For bonuses based on a percentage of basic pay: Enter the applicable rate (e.g., 100% of basic pay). Select Base On and choose the salary structure (e.g., Employee Master, Internal Grades, or NEC Grades).
6. For variable bonus amounts: Tick Manual Edit to enter amounts manually during processing.
7. Specify the default currency and save the transaction code.

When processing bonuses, you have two options to choose from:

1. Include Bonuses in a Normal Salary Run: This option combines bonus payments with regular payroll transactions, ensuring all earnings appear on a single payslip. This approach is convenient if you prefer simplicity and need to process bonuses alongside standard salaries.
2. Run Bonuses Separately in a Bonus Period: A dedicated bonus period isolates bonus calculations from regular payroll, generating a separate payslip exclusively for the bonus. This method provides clarity for both employers and employees by keeping bonus details distinct from routine salary components.

Each option has its advantages, and the choice depends on your organization’s preferences and operational requirements.

2. Creating a Bonus Period

A bonus period is a dedicated payroll period for processing bonuses. It ensures regular transactions do not interfere with bonus calculations and provides a payslip reflecting only the bonus and its related tax.

How to Create a Bonus Period

1. Go to Setup > Periods > Pay Periods.
2. Select the period preceding the bonus payment.
3. Click Insert, then check the box for Bonus Period.
4. Specify the start and end dates (e.g., 29/11/2024 for a bonus scheduled to be paid on the 29th of November).
5. Assign the appropriate accounting period.

For a step-by-step walkthrough, check out our YouTube Tutorial, Belina Zimbabwe. Once the setup is complete, the system will automatically guide you into the bonus period during a period-end process.

Important Note: Bonus periods do not change annual tax calculations. They simply ensure clarity by creating a separate payslip for the bonus.

3. Processing Bonuses on the Payslip

Once your bonus transaction code and period are set up, bonuses can be inserted into employee payslips:

1. For bulk processing: Go to Process > Other Inputs > Bulk. Select the bonus transaction code. Choose criteria for tagging the employees to bulk insert the bonus (e.g., use tagging and select all employees) and apply.
2. For individual processing: Go to Process > Payslip Input. Select the employee, click Insert, and enter the bonus amount. Click OK to save and update their payslip.

The system will automatically include the bonus in the employee’s earnings and calculate the tax-free portion.

Understanding the Tax-Free Threshold

Annual bonuses are tax-exempt up to $700 USD for the year. Any bonus amount exceeding this threshold is taxed based on the employee’s tax bracket.

For example:

• Bonus Amount: $1,000
• Tax-Free Portion: $700
• Taxable Portion: $300 (taxed based on the employee’s tax rate)

If the tax-free threshold changes during the year, the payroll system will adjust tax deductions automatically. Any over-taxed amounts from prior periods will be refunded in subsequent remaining periods for the current year.

Key Tips for Bonus Processing Success

• Use a Separate Bonus Period: Prevents regular payroll transactions from interfering with bonus calculations and ensures clear, focused payslips.
• Verify the Tax-Free Threshold: Double-check that tax-free portions and deductions align with current regulations.
• Review Tax Displays: Look for accuracy in the tax-free amounts and overall deductions on payslips.
• Plan for Recurring Transactions: Recurring deductions and allowances do not appear in bonus periods but will resume in the next payroll cycle.

Bonus Processing Done Right

When bonuses are processed correctly, they strengthen employee trust and satisfaction while keeping your payroll compliant. By setting up accurate transaction codes and understanding the tax-free threshold, you can streamline the process and avoid errors.

Have questions about bonus processing or need help setting up your payroll system? Chat with us today or explore our YouTube channel, Belina Zimbabwe, for tutorials and tips. By Ashlene & Tapiwa