Productivity Bonuses: Taxation, Eligibility, Limits, and What to Expect in 2025

Budget Law 2025: Tax Exemption on Performance Bonuses

The 2025 Budget Law confirms the continuation of tax exemptions on productivity bonuses over the next three years, namely 2025, 2026, and 2027.
The tax rate on performance bonuses is set at 5% within certain monetary limits.

Performance bonuses are a flexible and effective way for companies to motivate employees to achieve specific goals.
Such bonuses, which can be tailored to meet desired outcomes, provide both tax-saving benefits for companies and employees alike.

This initiative reaffirms what was established in the 2024 Budget Law, which, in turn, continued the provisions from the previous year’s legislation.
Productivity bonuses up to €3,000 will continue to be taxed at 5% throughout the 2025-2027 period.

Understanding Performance Bonuses

Before examining the rules established for 2025, it’s important to clarify what productivity bonuses are, who is eligible, and the applicable taxes.

Performance bonuses are awarded to employees when there’s an increase in productivity, quality, organization, or innovation.
This includes bonuses for enhanced efficiency and profit participation.
When employees meet set objectives, they receive a bonus subject to a substitute tax in lieu of personal income tax (Irpef), along with potential contributory tax benefits.

Regulatory Framework and Limits for 2025

The 2025 Budget Law upholds the changes introduced in the previous law regarding the substitute tax rate for productivity bonuses.
For amounts disbursed in 2025, the substitute tax decreases from 10% to 5% for bonuses up to €3,000.
For amounts exceeding this limit, the original tax rate continues to apply.

For bonuses awarded to employees involved in joint employer-employee initiatives, the threshold for substitute taxation rises to €4,000, applicable only to collective agreements signed before April 24, 2017.

Criteria for Tax Exemption

To qualify for the 5% tax exemption on performance bonuses, an increase in productivity or revenue must be demonstrated.
The criteria for determining this must be specified in the corporate or territorial collective agreement and filed with the ITL or DTL within 30 days post-signature.

Contribution Relief Guidelines

According to INPS Circular No.
104, contributors can benefit from a reduction on contributions related to performance bonuses, capped at €800.
This translates to a 20% reduction in the IVS contribution rate for employers, while the employee is exempt from contributions altogether.

Welfare Benefits Conversion

Employees also have the option to convert performance bonuses into company welfare benefits, as outlined in the TUIR.
This program provides additional support for employees, especially in the context of rising inflation.

Conclusion

The extension of the exempt tax rate on productivity bonuses represents a significant advantage for both employees and employers, promoting a culture of enhanced productivity while ensuring lower taxation burdens.

Key points summarized: bonuses up to €3,000 taxed at 5%, eligibility criteria must be defined in employment contracts, and employees can opt-out of the reduced tax rate through formal written notice.