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How to Issue a Bonus

A quick guide on how to process a bonus through Canadian payroll correctly, including source deductions, the bonus method, and gross-up calculations.

Bonuses are employment income — they are taxable and subject to source deductions, just like regular wages. The main difference is that lump-sum payments like bonuses are often taxed at a higher rate because the CRA treats them as if they were paid out over the entire year.

This article covers how to issue a bonus correctly so the tax treatment is right and the employee is not surprised.

What You Will Need

  • Access to QBO Payroll (or your payroll software)
  • The bonus amount
  • The payment date

How Bonuses Are Taxed

When you pay a bonus, the CRA's withholding rules treat the lump sum differently from regular salary:

  • CPP: Deducted on bonuses, up to the annual maximum
  • EI: Deducted on bonuses, up to the annual maximum
  • Income tax: The CRA requires you to withhold based on the "bonus method" — which effectively annualizes the bonus and taxes it at the marginal rate for that income level

This often results in more income tax being withheld on a bonus than the employee expects. It does not mean they pay more total tax — it just means more is withheld upfront. They will get a refund on their personal return if over-withheld.


QBO Payroll handles the bonus method calculation automatically.


Normal Procedure

Issuing a bonus as a separate payroll run

The cleanest approach is to process the bonus as a separate, off-cycle payroll run:

  1. In QBO Payroll, go to Run Payroll.
  2. Select the employee(s) receiving the bonus.
  3. In the pay type, look for Bonus (or add it as a pay type if not already set up).
  4. Enter the bonus amount.
  5. QBO will calculate the withholdings using the bonus method.
  6. Review the deductions and approve.
  7. Process the payment on the desired date.

Including a bonus in a regular payroll run

You can also include a bonus in the employee's regular pay period:

  1. Run payroll as normal.
  2. In the bonus pay type field, enter the bonus amount in addition to regular earnings.
  3. QBO applies the bonus method to the bonus portion automatically.

Note: Including a bonus in the regular payroll run may change the total withholding calculations for the period — review carefully before approving.


Abnormal Procedures

The employee wants the bonus grossed up so they take home a specific net amount.

A gross-up means you increase the bonus so that after deductions, the employee receives the amount you intended. For example, if you want them to take home $5,000 and taxes will be approximately 35%, the gross bonus needs to be higher. Your Mesa CPA bookkeeper can calculate the gross-up amount.


You want to defer the bonus to the next calendar year.

For a corporation, a bonus accrued in one calendar year must be paid within 180 days of the corporation's fiscal year-end to be deductible in that year. If you are accruing a bonus at year-end, confirm the payment timing with your Mesa CPA advisor.


You want to bonus a contractor rather than an employee.

Bonuses to contractors are simply additional invoiced amounts — no payroll processing required. Pay the invoice, ensure the contractor issues an updated invoice if needed, and confirm whether a T4A needs to be updated at year-end.


FAQ

Why did the employee say the tax on their bonus was higher than expected?

Because the bonus method withholds income tax at the marginal rate (the highest rate applicable to their income level). The employee likely will not pay more total tax — they will receive the difference back when they file their personal return. It is a timing issue, not a higher tax rate.

Can I pay a bonus in cash instead of through payroll?

No — not without payroll processing. Cash payments to employees are still employment income and must go through payroll with source deductions withheld and remitted. Paying in cash without deducting taxes is an illegal payroll practice.

Is a signing bonus treated the same as a performance bonus?

Yes, for tax purposes — both are employment income subject to the same deductions. Signing bonuses may also have clawback provisions if the employee leaves within a certain period; document this in the offer letter if applicable.

Are bonuses subject to vacation pay accrual?

In most provinces, yes — bonuses are considered part of gross earnings for vacation pay calculation purposes. Check the employment standards for the relevant province and confirm with your Mesa CPA team.