Understanding the Tax Implications of Year-End Bonuses
Diogo Pedro | Lawyer
Suppose you are an employer who wants to recognise and reward your employees for their valuable contributions and dedication. In that case, it’s important to know that you have the option to offer a performance bonus. This type of bonus, given as a token of appreciation for the services rendered to the organisation, not only serves as a motivating factor for employees but can also be structured in a way that potentially exempts it from taxation, providing an added benefit for both employer and employee.
In 2025, there is a proposal to provide a tax exemption on IRS (personal income tax) and an exclusion from Social Security contributions for amounts paid in the form of productivity bonuses, performance bonuses, profit sharing, and balance sheet bonuses. These bonuses must be paid voluntarily and without regularity, up to a maximum of 6% of the employee’s annual base salary. This exemption could allow these bonus payments to effectively function as an additional "fifteenth-month salary," which is distributed at the end of the year, providing employees with an extra financial incentive.
However, it’s important to note that this tax exemption will only apply under specific conditions. To benefit from the exemption, the employer must meet the following requirements during the year 2025:
- Implement a minimum increase of 4.7% in the annual base salary of employees who earn less than or equal to the average annual base salary within the company at the end of the previous year.
- Ensure a minimum overall increase of 4.7% in the company’s average annual base salary, compared to the base salary at the end of the previous year.
- Be covered by a collective labour agreement that has been concluded or updated within the past 3 years.
The salary comparison for determining whether the exemption conditions are met must be made by comparing the base salary at the end of the current year with that at the end of the previous year. This ensures that the salary increase is properly evaluated and that the employer complies with the required conditions for the exemption to apply.
In terms of the exemption itself, the IRS exemption limit for each employee corresponds to a fixed monthly salary, with a maximum cap of 5 times the minimum wage. This means that the maximum exemption amount for each employee is €4,100.00.
For employers to ensure proper application of this exemption, they must explicitly state in the annual income statement provided to employees that the required conditions for the exemption have been met. This is a necessary step in maintaining transparency and compliance with tax regulations.
The withholding tax rate for these bonus amounts is based on the monthly salary of the employee for the month in which the payment is made. The Tax Authority (AT) provides guidance regarding the payroll processing of employees, reminding employers that the amounts paid as balance sheet bonuses will be included when determining the progressive tax rates for other income. This means that the bonus payments must be considered when calculating the applicable withholding tax rate, which could affect the final tax amount for the employee.
Additionally, these bonus amounts are excluded from the contributory base for the Social Security Pension System's Contribution Regimes, ensuring that they do not increase the employee's Social Security contributions.
In summary, productivity bonuses, performance bonuses, profit-sharing, or balance sheet bonuses paid voluntarily and without regularity—up to an amount equal to or less than 6% of the employee's annual base salary—are exempt from IRS and Social Security Contributions (TSU). However, this exemption only applies if the employer meets the conditions outlined above, including implementing the required salary increases and being covered by a valid collective labour agreement. If all these conditions are met, the employer can offer employees a performance bonus that is both a reward for their efforts and a tax-efficient way to enhance compensation.
If you need help understanding the tax implications of the benefits provided to your employees, reach out to us.
