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Bonuses and tax withholding: what comes off a bonus

A bonus is ordinary employment income, but it is usually paid on its own, so the deductions look different from those on a regular paycheque. Employees often feel it has been taxed at a special high rate, and employers sometimes guess at a percentage. In fact the CRA sets out a specific method for each deduction. This article explains how CPP, EI and income tax are handled on a bonus, with illustrative examples, and what to do when the withholding does not fit the person.

Sora Accounting & Tax · General information · Editorial policy
Updated · 5 min read

What comes off a bonus before it is paid

Shows one bonus splitting into CPP contributions, EI premiums and income tax withheld, with the remainder paid to the employee.

Visual labels: CPP contributions; EI premiums; Income tax withheld.

See the sourced 2026 Ontario tax guide: rates, limits and deadlines →

What to take away

  • Employers must withhold CPP, EI and income tax on a bonus and report it as employment income on the T4 for the year it is paid.
  • Income tax on a bonus is usually the extra tax the bonus causes, calculated with the CRA’s bonus method, not a fixed rate.
  • Withholding is an advance, so the actual tax on the bonus is settled on the employee’s tax return.

A bonus is employment income

The CRA treats bonuses, retroactive pay increases and other additional or unusual payments as employment income that you report on the T4 for the year the employee receives them. They show up in box 14 (employment income), box 24 (EI insurable earnings) and box 26 (CPP pensionable earnings). The year-end timing is what counts: a bonus paid in January belongs to the new year even if it rewards last year’s work.

This also holds if you are an owner-manager who is an employee of your own corporation. A bonus paid to you as an employee is generally handled like any other employee’s bonus. Whether and when to declare one is a planning question, covered in the article on paying bonuses before corporate year-end.

Why the bonus cheque can look so small

Payroll software usually treats a bonus as an extra amount on top of a year’s regular pay, so the extra income is taxed as if it sat at the top of the employee’s earnings. The result is a larger percentage coming off the bonus than off regular pay, even though the employee’s return is not taxed at a special rate.

The amount withheld is an advance on the employee’s final tax. If too much was withheld, the difference comes back as a refund when the return is assessed; if too little, a balance is owing. Telling the employee this before the bonus is paid avoids most of the surprise.

CPP and EI on a bonus

The treatment depends on how the bonus is paid. If it is paid with regular pay, the CRA says you can use the Payroll Deductions Online Calculator or the regular tables. If it is paid separately from regular pay, the CPP bonus method applies: because the basic exemption is not included, you multiply the bonus by the 5.95% CPP rate, up to the point where the employee reaches the $4,230.45 yearly maximum with you. CPP2 also applies once earnings pass $74,600, at 4% up to $85,000 and a $416 maximum.

EI works differently. The CRA’s EI tables can be used for bonuses, and the 1.63% rate applies to insurable earnings up to the $68,900 ceiling and a $1,123.07 maximum. Your share is 1.4 times the employee’s. For a $2,000 bonus paid separately to someone below both maximums, that is an illustration of about $119.00 of CPP (matched by you) and $32.60 of EI (with your share about $45.64).

Income tax: the $5,000 rule and the bonus method

First add the bonus to the employee’s expected total pay for the year and subtract the permitted deductions, such as registered pension plan contributions, union dues, deductible RRSP contributions made through payroll and the employee’s additional CPP contributions. If that total is less than $5,000, the CRA says to withhold 15% of the bonus. As an illustration, a $400 bonus for a part-time worker whose annual pay will stay under $5,000 has $60 withheld.

If the total is above $5,000, the CRA’s method compares tax with and without the bonus. You divide the bonus by the number of pay periods and add it to regular pay for one period, look up the federal and provincial tax for that adjusted pay and for regular pay in the tables, subtract, and multiply the difference by the number of pay periods. Any extra tax the employee asked for on the TD1 is then added.

More than one bonus in a year

The calculation changes when an employee receives a second or later bonus. The CRA’s method then takes the earlier bonuses into account when working out the adjusted pay rate, so the second bonus is measured against the tax already caused by the first. This is another reason not to apply one fixed percentage across the year.

Keep a running record of every bonus, with the date, the amount and the method used. If an employee changes TD1 amounts between bonuses, use the current claim codes and note the date you received the new forms. Payroll software normally tracks this, but confirm that a manually entered bonus is flagged as a bonus and not as regular pay.

When an employee wants less withheld

Employees sometimes ask you to reduce withholding because they plan to contribute the bonus to an RRSP. You cannot simply agree. The CRA requires a letter of authority, which the employee requests with Form T1213, Request to Reduce Tax Deductions at Source. You keep the letter with the payroll records, do not send it back, and reduce withholding only by the amount it specifies.

Employers expecting many employees to do this can ask the CRA for a blanket waiver. If it is approved, each employee completes a declaration of intent, and you reduce the taxable amount of the lump sum by the amount declared. An employee can also go the other way and ask for more tax to be withheld by completing a revised TD1.

Payments that look like bonuses but are not

Some irregular amounts follow other rules. A retroactive pay increase is calculated by comparing the old and new pay rates, and a retroactive payment for earlier years may be a qualifying retroactive lump-sum payment that the employee can have taxed more favourably on their return. Lump sums and retiring allowances use separate withholding rules, and a gift card or other perk may be taxable under the benefits rules instead; see the article on gifts and perks for employees.

The basic question is whether the amount is for work, a benefit or a termination. Decide that first, because the answer changes which CPP, EI and tax rules apply and which T4 boxes you use.

Get the bonus right the first time

Run the bonus through the Payroll Deductions Online Calculator or your payroll software, and keep a note of the method. If you under-deduct CPP or EI, you owe both shares, and you may only recover the employee’s portion within the CRA’s limits. You also cannot change the nature of the payment after the fact, for example from salary to dividends, because the CRA treats that as retroactive tax planning.

Bring your payroll register, the employee’s TD1 forms, any letter of authority and a list of bonuses already paid to your accountant. Ask which method applies, how the bonus affects the corporation’s deduction, and how it ties to the year-end T4 summary.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.