Awards and Bonuses: Who Received Support, Is Entitled Only to Tax-Free Five Thousand Kuna

Good business indicators achieved in the current year in some companies are an incentive for the payment of bonuses and awards for achieved work results even before the end of 2021. Bonuses and awards are paid to members of the management board and employees, and their tax characteristics depend on the employment status of the recipient and the amount of the award. Over the past four years, the Croatian income tax system has recognized two forms of annual awards for achieved work results: tax-free and taxable amounts of the award.

Employers who have utilized cash support from the Employment Service for the payment of net salaries under special circumstances caused by the impact of the coronavirus pandemic since May 29, 2020, if they have used these measures for 50 or more employees, are prohibited from paying taxable bonuses to members of the management board and other persons authorized to conduct the employer’s business until December 31, 2021. However, they can also receive a tax-free amount of the annual award under the same conditions as other employees.

Tax-Free Five Thousand Kuna

The tax-free award for achieved work results is prescribed in the annual amount of five thousand kuna per employee and can only be paid to persons who have established an employment relationship with the payer. The amount of five thousand kuna is not subject to any contribution obligations and does not affect the rights of employees in social security systems. It can be paid as a one-time annual income or in several installments during the tax year, even as a regular monthly income in a proportional amount. The tax-free amount is limited on an annual basis per taxpayer, so payers must check on the Tax Administration’s website whether their employee has utilized this tax benefit with another or other payers in 2021. In principle, verification is required for employees who were employed during 2021 if they had previously been employed by another employer and for employees who work part-time with two or more employers.

Tax regulations do not specify any additional criteria for the payment of the tax-free annual award; the decision is made by the employer in accordance with the sources of labor law that bind them. The award can be paid only to some employees and does not have to be provided to everyone in the same amount. The tax regulation does not impose restrictions regarding the duration of the employment relationship in the year of payment or regarding the working hours of employees. The award of five thousand kuna can be paid tax-free to an employee who has been employed very briefly with that employer and to an employee who works only a few hours a week. This tax-free amount can also be paid as an award to self-employed individuals, farmers, and persons engaged in freelance professions.

The amount of the paid tax-free annual award for work results is reported in the JOPPD form on the day of payment of the income, so that the tax administration can promptly monitor the prescribed limitations for each taxpayer individually. For individuals who have an open protected account, the tax-free award is paid to a current account protected from enforcement on cash funds, but cash payments and the provision of this income in goods or services are not allowed.

Tax and Contribution Calculation

If the award is paid in an amount exceeding five thousand kuna or is paid to a person who has fully or partially utilized the right to this tax-free income during the year or if it is stipulated by an act binding the employer that awards, bonuses, and similar forms of stimulation and rewarding are paid as salary, the employer is obliged to calculate and pay all prescribed public levies from the salary and on the salary for the paid amounts. In this case, the payer may not use the highest monthly base for the calculation of contributions for pension insurance on that income, but may use the highest annual base prescribed for 2021, which amounts to 661,032 kuna. The highest annual base applies only for the calculation of contributions for generational solidarity pension insurance, while contributions for individual capitalized savings pension insurance and contributions for mandatory health insurance are paid on the full amount of the taxable award or bonus.

If the award recipient, after having already paid the contribution for generational solidarity pension insurance on the highest annual base for 2021, subsequently receives a regular monthly salary, e.g., salary for November and December 2021, contributions for the first pension pillar are no longer calculated on those incomes, but the highest monthly base for paying contributions for the second pension pillar (for 2021 amounts to 55,086 kuna) can be utilized. If the bonus is paid to a member of the management board who is not employed in that company, the income is taxed as other income in the total amount.

The payer is obliged to notify the Tax Administration on the day of payment of the taxable awards and bonuses on the prescribed form, using different codes for the type of income for employees and for employed members of the management board. The net amount must be paid to the regular current account of the recipient as enforcement rights do not provide protection for these incomes from enforcement. 

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