Is 13 Month Salary Taxable?

At the end of every year, companies may decide to pay a 13 month salary. In many cases, the amount paid is decided close to the end of the year. While in other cases, it is known and included in the annual budget. But, the issue is whether tax liability is accrued on such salary.

What's a 13 Month Salary?

It is an extra salary in the form of a bonus, allowance, or share of profit decided by the company's top management to give staff as an appreciation for working with them from January to December. Generally, not all employees received a 13 month salary. The decision depends on the entity's policy. Some policies might say that the individual must have worked with the organization for at least eight months. Therefore a new employee that is less than eight months is not entitled to it.

Should you tax a 13 month salary?

A straightforward answer is in the affirmative. There are two ways to prove that all employees entitled to a 13 month salary must be taxed. They are the principle of WREN and income chargeable.

Principle of WREN

In taxation, to decide whether an expense by a company is allowable or should not be taxed, the WREN test is used. WREN means wholly, reasonably, exclusively, and necessary to the business. This means that the expense must pass this test to be regarded as allowable expenses. For example, assume a sum of money, say 100,000 Naira is given to an employee to carry out some official duty. Also, assume that the employee spent 120,000 instead. 

Here, the company management will have to decide if the expense is WREN. When it can be proven that the money spent is wholly, reasonably, exclusively, and necessary spent for the employee's official duty then it is tax allowable to the company. For a 13 month salary, the amount paid to the employee is not for any official duty. It is to show appreciation for being there for the entirety for a one year period. Therefore, it is tax deductible.

Income chargeable

Salary is general taxes based on the personal income tax act (PITA). The amended act of 2011, section 2c paragraph 1(b) shows that income chargeable to tax under personal income tax includes any salary, wage, fee, allowance or gain or profit from employment including compensation, bonuses, premium, or benefits given to either a temporary or permanent employee.

The act makes it clear that any amount given to an employee as salary, wages, bonuses, allowance, commission, compensation, share of profit, and so on are tax deductible. A 13 month salary is either a share of profit or bonuses given to employees. Therefore, it is accessible for taxation purposes.