Understanding the Tax Implication of the 2024 Bonus Tax-Free Threshold Adjustment.
The recent finance bill (H.B 8 of 2024), enacted by the Parliament and the President of Zimbabwe amended our current Finance Act [Chapter 23:04], the Income Tax Act [Chapter 23:06], the Value Added Tax Act [Chapter 23:12], the Capital Gains Tax Act [Chapter 23:11], and the Customs and Excise Act [Chapter 23:02].
A key development for the Payroll and Human Resources community is the increase in the tax-free bonus threshold, raising the limit from USD $400 to USD $700 (or the equivalent in local currency) per annum. This adjustment presents businesses with an opportunity to provide employees with a higher tax-free bonus. However, careful consideration of the methods used to calculate and tax these bonuses is also necessary.
Let’s break down how this impacts payroll processing and what steps you need to take to ensure compliance while maximizing benefits for your employees.
1. How the USD$700 Tax-Free Bonus Works
The tax-free bonus is applied on an annual basis, meaning that employees can now receive up to $700 in bonuses within the calendar year without incurring tax. However, if the total bonus paid to an employee exceeds this threshold, the amount above USD$700 will be subject to taxation as an irregular earning.
Key Points to Consider:
It is Applicable per annum: The $700 tax-free bonus applies to bonuses paid within the year. This means payroll teams need to calculate bonuses cumulatively to determine whether an employee’s year-to-date (YTD) bonuses exceed the tax-free threshold.
If you had already paid Bonuses earlier in the year (Exceeding USD$400): If an employee received a bonus earlier in the year that exceeded the old USD$400 limit, the tax would have been calculated on the excess above the threshold. Once the new limit is applied in Belina Payroll, the system will consider the over-deductions from the previous bonus payments and re-calculate the tax for the remainder of the payroll periods.
If you had already paid Bonuses earlier in the year (Not Exceeding USD$400): If an employee’s total bonuses for the year are still under $700, no tax will be deducted. Moving forward, all bonus payments should be aligned with the updated limit to ensure accurate taxation.
2. Practical Steps for effecting the change using Belina Payroll
Implementing the change in Belina Payroll is quick and simple. Follow these steps:
- Go to Setup > Tax > Existing. (Ensure your tax effective date is within 2024)
- Update the Bonus Amount: Change the tax-free bonus amount from $400 to $700.
- For Local Currency Payrolls: Input the local currency equivalent of $700 at the time of payment of the bonus.
After making this update, Belina Payroll will automatically recalculate any over-deducted tax on bonuses paid earlier in the year. The system will apply the correct adjustments in subsequent payroll periods, ensuring that employees receive the appropriate tax corrections.
3. Communicating the Tax-Free Bonus Change to Employees
Employees must be made aware of the change to the tax-free bonus limit and how it affects their pay. Effective communication will help manage expectations whilst ensuring compliance. Here’s how you can share the news with your employees:
- What the tax-free bonus change means: Inform employees that they are now eligible to receive up to $700 in bonuses annually without tax deductions. This is an increase from the previous limit of $400, and it directly benefits them.
- Addressing over-deductions: If employees received a bonus earlier in the year and were taxed based on the old $400 limit, explain how payroll will handle the over-deduction. Clarify that any tax taken on bonuses that now fall under the $700 limit will be adjusted in future payslips.
- How future bonuses will be processed: Reassure employees that all future bonuses will be calculated using the new $700 tax-free limit, ensuring they get the most out of their bonus payments.
Use your company’s communication channels, such as email, payroll portals, Belina Connect, or even a Q&A session, to provide clear and concise information.
Final Thoughts
The shift in the tax-free bonus threshold from $400 to $700 provides a valuable opportunity for employees to benefit from a larger portion of their bonuses. For payroll processors, this change requires careful recalculation and communication to ensure compliance and employee satisfaction.
By keeping accurate YTD bonus records and addressing any over-deductions from earlier in the year, payroll teams can smoothly navigate this transition and optimize bonus payouts for employees. Don’t forget to keep employees informed at every step, ensuring they understand the impact of this change on their pay. By Ashlene Moyo