2. What are the differences in the lump-sum bonus policy?

The core of the lump-sum bonus policy lies in the different tax calculation methods. Our country has a seven-tier progressive individual income tax rate ranging from 3% to 45%. Before the implementation of the new individual income tax law in 2019, taxes were paid monthly, and the higher the monthly income, the higher the tax rate. Because lump-sum bonuses are generally large, the tax rate jumps repeatedly in the month they are paid, easily reaching the highest rate of 45%, nearly halving the income after paying taxes. To address this unreasonable phenomenon, Guoshuifa [2005] No. 9 stipulates that year-end bonuses can be allocated to each month, with the applicable tax rate determined, and individual income tax calculated separately for the year-end bonus. Specifically, the lump-sum bonus income is divided by 12 months. The resulting amount is then compared against the monthly tax rate table to determine the applicable tax rate and quick deduction, and the tax is then calculated separately.

To facilitate understanding, let's take an example: Suppose a full-time attorney at a law firm receives an annual commission bonus of 300,000 yuan for a case. If there is no one-time bonus policy, individual income tax will be withheld in the month of payment. The calculation formula is: Tax payable = Monthly income × Applicable monthly tax rate – Monthly quick deduction. If the monthly income exceeds 80,000 yuan, the corresponding tax rate is 45%, and the quick deduction is 15,160 yuan.

Tax payable is: 300,000 yuan × 45% – 15,160 yuan = 119,840 yuan.

With the one-time bonus policy, the calculation formula is: Tax payable = Annual one-time bonus income × Applicable monthly tax rate – Monthly quick deduction. 300,000 yuan / 12 = 25,000 yuan, corresponding to a 20% monthly tax rate, and the quick deduction is 1,410 yuan.

The tax payable is: 300,000 x 20% - 1,410 = 58,590 yuan.

The difference in tax burden before and after the policy is a staggering 51.1%. Therefore, we can understand that the key to the lump-sum annual bonus policy is the separate tax calculation, which is equivalent to a tax incentive.

3. Evolution of the Lump-Sum Bonus Policy

The revised Individual Income Tax Law, implemented on January 1, 2019, expanded the scope of comprehensive income, making the seven-tier progressive tax rate applicable to a wider range of income. Furthermore, the previous monthly calculation and payment model was changed to a monthly advance payment model with annual final settlement. While theoretically cumbersome, this model is more equitable. However, when it comes to lump-sum bonuses, if they are consolidated at year-end, they cannot be spread over 12 months, and the lower tax rate applied based on average monthly income will significantly increase the tax burden compared to a separate tax calculation.

To enhance taxpayers' compliance with the tax law and ensure a smooth transition to the new individual income tax reform, the state has established a policy transition period for lump-sum bonuses. According to the "Notice on the Continuation of Preferential Policies Following the Amendment to the Individual Income Tax Law" (Cai Shui [2018] No. 164) issued by the Ministry of Finance and the State Administration of Taxation, lump-sum bonuses can be calculated separately according to the method prescribed in Guo Shui Fa [2005] No. 9, or they can be included in the current year's comprehensive income calculation for tax purposes. However, this transition period only lasts until December 31, 2021. Starting January 1, 2022, lump-sum bonuses should be included in comprehensive income for tax calculation purposes.

Three days before the policy for separately taxing lump-sum bonuses was set to expire, Premier Li Keqiang outlined continued tax and fee reductions at a State Council executive meeting. Subsequently, on December 31, 2021, the day the policy expired, the Ministry of Finance and the State Administration of Taxation issued the "Announcement on the Continuation of Individual Income Tax Preferential Policies Regarding Lump-sum Bonuses and Other Individual Income Tax Benefits" (Ministry of Finance and State Administration of Taxation Announcement No. 42 of 2021), extending the separate taxation policy for lump-sum bonuses until December 31, 2023.

4. How does the legal profession apply to the lump-sum annual bonus policy?

Since the government has provided preferential policies, we can fully utilize them in accordance with the law and regulations to manage our tax burden. For example, in my profession, because the Lawyers Law defines the organizational form of law firms, individual income tax becomes the primary tax burden faced by law firm members: partners, full-time lawyers, administrative support staff, part-time lawyers, and lawyer employees.

For law firm partners, "business income" individual income tax is subject to a five-tiered progressive tax rate ranging from 5% to 35%. Even if the law firm pays a partner a salary, this amount is ultimately included in business income and does not qualify for "wages and salaries" taxation. To distinguish a black cat from a white one, first determine whether it is a cat. Lump-sum annual bonuses are considered a "wages and salaries" item in the individual income tax. As owners or investors of businesses, owners and shareholders of corporations and other entities subject to corporate income tax policies can receive actual wages and salaries as members of the entity. Owners and partners of partnerships and sole proprietorships, on the other hand, receive only nominal "wages and salaries," which are included in tax law as production and business income. Therefore, the lump-sum annual bonus policy does not apply to groups like law firm partners whose income is not related to "wages and salaries."

Law firms are eligible for the lump-sum annual bonus policy only for individuals whose income from the firm is subject to individual income tax at a seven-tiered progressive tax rate of 3% to 45% as "wages and salaries," including full-time and part-time lawyers and administrative staff. Support staff employed by lawyers are taxed as "labor remuneration" and then included in comprehensive income for tax calculation. The lump-sum annual bonus policy does not apply to these individuals unless they are designated as legal support staff employed under the law firm's name.

After understanding the applicable objects of the policy, let's take a look at how to plan. The basic principle is that if all income is distributed regularly in the form of wages and salaries, and the annual reconciliation is pre-paid on a regular basis, the amount of refund or supplementary payment should be the actual amount. However, if part of the income is distributed as wages and salaries, and another part is distributed in the form of an annual one-time bonus, it can not only use the preferential policy of separate taxation of the annual one-time bonus to reduce part of the tax burden, but also make full use of the amount space between the individual tax brackets. Through the monthly income design, it can effectively solve the unique "1 yuan" dilemma of the annual one-time bonus, that is, the tax rate increases by one level due to exceeding the critical point of the tax rate change, resulting in a jump in the tax burden. Especially for the annual one-time bonus with a large amount, if it is not measured well, it seems that tens of thousands of yuan are issued more, and the tax payment is thousands or two thousand yuan less than if it is not issued, not to mention the extreme situation of more than 1 yuan and tens of thousands of yuan less.

5、 Fully utilizing policies can achieve good tax savings

Example 1: A lawyer has an annual income of 180,000 yuan and an average monthly special deduction of 1,200 yuan. If it is distributed monthly according to the wage and salary model, the annual individual tax payable is 8,040 yuan. If it is distributed according to the wage and salary + annual one-time bonus model, that is, the monthly wage and salary is 12,000 yuan and the year-end case bonus is 36,000 yuan, it can save 31.34% of tax compared with the previous one, and the tax saving amount is 2,520 yuan.