The country’s citizens have to pay a certain amount of money or mandatory fee to the government, called taxes. The fund gets utilized for the well-being and upliftment of the country. There are many taxes that the citizens have to pay, including Direct Tax, Indirect Tax, and many other taxes. Income tax comes under the category of Direct tax. Now, the question is, Is a signing bonus taxable?, apart from Income Tax?
A signing bonus is an encouraging bonus offered by the employer when recruiting new employees. Various companies have different ways to motivate their employees, and signing bonus plays an important role. Some companies pay onetime cash bonuses whereas others make the new employees shareholders by providing their company stocks. This strategy inculcates a sense of belongingness to the company and makes the employees work harder to become more profitable. By giving a signing bonus, one treats the company as their own and takes care of it.
Even the employees retain the confidential information with them, as the company belongs to them. This small step by companies became very successful, and more and more people are following the approach. Income earned by every citizen is taxed under the law of the country. If the signing bonus is cash, the employee is taxed as per the tax bracket in which they fall, whereas if the signing bonus is of stock, it will be the capital gains that will get taxed as per the rules. The signing bonus is treated as part of the salary from the government’s perspective for that financial year.
Conditions of Receiving Signing Bonus
The signing bonus received by the employees comes up with several conditions and is treated as an additional incentive. The newly hired employee should fulfill the requirements.
- The employee should join the organization on the exact date specified in the contract; else the bonus won’t get paid.
- The new employee has exceptional skills that are rare to find in the candidate. Then the company pays a signing bonus to make sure they join the company.
Condition to Withhold the Signing Bonus
It is not necessary that if an employee is entitled to a signing bonus, they can retain the premium no matter what. The signing bonus comes with few points to be taken care of.
- If the employee gets a signing bonus, they have to serve for a minimum term as written in the contract. Leaving the company before will cancel the signing bonus.
- If the employee is unable to hold up the employer’s expectation, they can cancel the bonus.
Consideration Of Signing Bonus For Tax
The marginal tax rate is the term used for tax paid on any additional penny on the income. This rate is dependent on total revenue and increases as the salary hikes. The method is based on how much an individual earns. A signing bonus is a special bonus that is provided in addition to the medical facility, compensation, vacations, and any benefits included in the hiring contract. The signing bonus money is taxed based on marginal tax applicable to the employees, and the tax bracket goes all the way from 10 percent to 37 percent, which is a considerable amount to be taxed.
Claiming For Refund
In most cases, if an employee is entitled to a signing bonus, they get it as they join the company. But sometimes, the employers hold the signing bonus and release as per the milestones achieved by the employees. There are times when the employees get a total signing bonus at hiring and then leave the company before the contract time. The employee must refund the entire amount, including deducted taxes, to the employer in this condition. The candidate has to file an income tax return to get a refund of the deducted tax.
Repayment Of The Signing Bonus
Various conditions occur where due to some reason or the other, the signing bonus is refunded. Employees can refund the signing bonus in two types:
- Refund the signing bonus in the same year.
- Refund the signing bonus in a different year.
If the bonus is refunded in the same year, then the employee has to pay only the extra amount received to the employer back. For the other case, if the signing bonus is repaid in a different year, then the tax factor comes into play, and a personal tax return has to be file for the taxes they have already paid.
A signing bonus is usually provided to make the position in the organization more attractive to the employee. It also solves the problem of maintaining the salary expectation of the employee without increasing the pay scale. But the signing bonus is taxable under the Income-tax Act, and the taxes are to be taken care of. Various factors define the tax that has to be paid on the signing bonus as the government taxes each penny.
Frequently Asked Questions
- Does the bonus reflect on the salary slip?
Yes, the signing bonus gets reflected on the initial salary slip, which gets taxed.
- Can the signing bonus be taken back by the employer?
Yes, the bonus can be taken back anytime, according to the performance of the employee.
- Does signing bonus have a different tax rule than the salary?
No, the signing bonus is treated the same as the salary and is taxed under the same rules.