Analysis of Tax Issues Related to Company Annual Parties | Red Packets, Outstanding Employees, and Lucky Draws
Tax implications of company annual party rewards in China, covering red packets, employee awards, and lucky draw prizes under personal income tax regulations.
What’s more exciting than New Year’s Day? It’s the Lunar New Year!
What’s more exciting than the Lunar New Year? It’s the annual party (year-end banquet)!
Of course, the most important part is the Lucky draw!
While winning a prize is certainly exciting,
When you receive your monthly salary, you find that your personal income tax
Has actually increased!
In reality, many forms of income during the annual party may constitute taxable events.
Some companies may handle this on behalf of employees,
But some companies may insist on a ‘compliance’ approach and require employees to handle it themselves.
Let’s use a little story
To see how many tax-related items there are in an annual party.
This article represents only the author’s personal views and should not be considered legal advice or opinion.
Xiao Li is an employee of a game company. One of the main reasons he chose this company was that the boss is generous, and the annual party lucky draw has no tricks — everyone gets a prize.
This year’s annual party was held at a hotel, and Xiao Li followed the crowd to the venue.
As soon as he sat down, he found the company group chat buzzing with messages.
I. The Boss’s Group Red Packets
“Thank you, boss!”
“Thank you, boss!”
…
“Oh no!” Xiao Li scrolled up and saw that the boss had started sending warm-up red packets in the group.
He tapped on a red packet, but sure enough, they were all gone.
But it was okay; with the help of his outgoing colleagues, the boss sent a few more rounds of red packets.
Afterward, Xiao Li counted and found he had grabbed exactly 168 yuan.
Good fortune all the way!
Group Red Packets Are Generally Considered Gifts
According to the Civil Code:
Article 657: A gift contract is a contract in which the donor gives their property to the donee free of charge, and the donee expresses acceptance of the gift.
Article 658: The donor may revoke the gift before the transfer of the gift property rights. Civil Code
In a previous article, we learned about the nine types of income subject to personal income tax as listed in the Individual Income Tax Law.
“Gifts” are clearly not among them.
According to the Announcement on Issues Concerning the Application of Taxable Income Items to Personal Income from Certain Income (Ministry of Finance and State Taxation Administration Announcement No. 74 of 2019) (Document No. 74), “gifts” subject to personal income tax currently include only the following two types:
-
Accepting real estate gifts from others (except gifts to relatives, bequests, gifts to persons who raised or supported the donor, etc.);
-
Enterprises giving gifts or cash (excluding coupons) to third parties during annual meetings, symposiums, celebrations, and other activities (the right to use the goods also counts);
The boss’s act of giving red packets to employees does not fall within the above scope.
Therefore,
The act of “giving red packets” does not require payment of personal income tax.
But note: Prerequisite: the red packet comes from the boss’s own pocket (not company funds).
II. Outstanding Employee Awards
The annual party proceeded as usual, following the same process as every year, with colleagues’ performances and departmental awards interspersed during the meal.
When Xiao Li heard the host announce the next award was “Outstanding Employee,”
He stopped stuffing food into his mouth, took a sip of water, and quietly straightened his clothes.
After all, HRBP had already informed him in advance that he had won.
Xiao Li heard the host call his name, quickly stood up, walked to the stage with a smile, greeting familiar colleagues from other departments along the way. He went on stage, shook hands with the boss, took the award and the big red envelope, took a group photo, and came off stage.
Back in his seat, Xiao Li weighed the thickness of the red envelope.
Just like previous years,
2000 yuan.
Outstanding Employee Awards May Be Considered “Labor Bonuses”
According to the Regulations on the Implementation of the Individual Income Tax Law of the People’s Republic of China:
Article 6: The scope of various individual incomes as defined in the Individual Income Tax Law: (I) Income from wages and salaries refers to wages, salaries, bonuses, year-end bonuses, labor dividends, allowances, subsidies, and other income obtained by individuals due to their employment.
Therefore, the “bonuses” accompanying various outstanding titles awarded at the annual party
Should be classified under “income from wages and salaries” and included in the monthly personal income tax calculation.
Simply put,
This 2000 yuan must be combined with the month’s salary
To calculate the personal income tax payable for that month together.
The more you receive, the more tax is deducted.
Additional note:
‘Hard work fees’ earned from performing at the annual party, hosting, etc., must also be included in ‘income from wages and salaries.‘
III. Firsst Prize!
If the enthusiasm of the annual party could be measured,
Then the peak would definitely be the announcement of the first prize lucky draw result.
Although in previous years, it ultimately came down to “everyone gets a prize,” The consolation prizes afterward might not match the value of the first prize. As the protagonist of this article, how could Xiao Li not win?
“The winner of the first prize is: … Xiao Li! …”
Amid the envious applause of his tablemates, Xiao Li ran to the stage again.
Excitedly, he took the square box from the boss’s hand.
“Finally, I can change my phone. This phone is worth 9000 yuan.”
Physical Prizes at the Annual Party May “Not” Require Tax, or May Require 20%, or May Require 3%-45%
Whether lucky draw prizes at the annual party are calculated as “incidental income” or “income from wages and salaries” may vary among tax authorities.
Article 6: The scope of various individual incomes as defined in the Individual Income Tax Law: (I) Income from wages and salaries refers to income obtained by individuals due to their employment, including wages, salaries, bonuses, year-end bonuses, labor dividends, allowances, subsidies, and other income related to employment. … (IX) Incidental income refers to awards, prize winnings, lottery winnings, and other income of an incidental nature.
Some tax authorities may consider that receiving prizes at an annual party, which can only be attended by virtue of being an employee, is “income related to employment.”
Jiangsu Province Taizhou Local Tax Bureau Q1 2015 Hot Issues Q: How should personal income tax be levied on prizes won by employees at the company annual party? A: According to Article 2, Item 2 of the Notice on Issues Concerning Personal Income Tax on Gifts Given During Enterprise Promotions and Exhibitions (Cai Shui [2011] No. 50): (omitted). Item (I) of Article 8 of the Regulations on the Implementation of the Individual Income Tax Law stipulates: (omitted). From the above two provisions, prizes given by the company to individuals outside the company should fall under “other income” (Note: now called “incidental income”), while annual party lucky draw prizes for the company’s own employees should fall under “income from wages and salaries,” and therefore, the prizes for employees at the company annual party should be included in the monthly wages and salaries for calculation of personal income tax.
Some tax authorities may consider this income obtained based on “incidental lucky draw” (assuming the annual party prizes are variable or not for everyone).
Zhejiang Shaoxing Local Tax Bureau Shao Shi Di Shui Ji Fa Zi [2015] No. 91
From June 15, 2015, to July 22, 2015, we inspected your entity’s tax-related matters from January 1, 2012, to December 31, 2014. The violations and penalties are as follows:
I. Violations … 2. In January 2013 and January 2014, lucky draw prizes of 33,600 and 131,259 yuan were paid during company parties, and personal income tax of 6,720 and 26,251.80 yuan was not withheld at source as “incidental income.” In November 2014, prizes of 4,762 yuan were paid during company essay activities, and personal income tax of 952.40 yuan was not withheld at source as “incidental income.”
The author is more inclined to agree with classification as “income from wages and salaries,” as it can be distinguished from Document No. 74.
However, what is certain is: tax must be paid.
If it is incidental income, tax is calculated at 20% of the prize value;
If it is wages and salaries, it is included in the salary for tax calculation, with the applicable rate ranging from 3% to 45% depending on the personal income tax bracket.
If the company’s annual party is held at the beginning of the year, it’s not so bad.
But if it’s at the end of the year, in December,
Just figuring out which classification — ‘incidental’ or ‘wages’ — is more cost-effective could drive you crazy.
IV. What Are the Penalties If the Company Fails to Withhold Tax After Giving Prizes?
Currently, many companies may offset the tax through “expenses” (such as “welfare expenses,” etc.).
But this may constitute “tax evasion” or even “tax fraud.”
However, given that the social impact is not particularly severe, in practice, the company is typically penalized under Article 69 of the Law on the Administration of Tax Collection of the People’s Republic of China:
Article 69: Where a withholding agent fails to withhold or collect tax that should have been withheld or collected, the tax authorities shall recover the tax from the taxpayer and impose a fine of not less than 50% but not more than three times the amount of tax that should have been withheld or collected on the withholding agent.
Based on the amount of tax that should have been paid (not withheld) (not the total value of the prizes), a fine ranging from 50% (typically) to 300% may be imposed.
V. Conclusion
In the current market environment,
Companies that can still hold annual parties and even lucky draws are truly “conscientious companies.”
Especially if there is also a “consolation prize for everyone,” it is even more of a “good company.”
In the past, most companies would properly handle tax issues for their employees.
But considering the current situation,
Handling “withholding and payment on behalf” in compliance for employees can also be a risk-avoidance strategy.
Of course,
How to manage employees’ psychological expectations is also a difficult issue.
[Why not forward this article to your employees?]
