Can you teach me how this tax avoidance works? It seems that I am missing out. Can you also specify the jurisdiction where this works?
> mostly part of their contract
I can think of many people whose bonuses are 3x or more their salary and who do not have a guaranteed minimum bonus or even a strict formula based bonus.
1. The Percentage Method
The IRS specifies a flat “supplemental rate” of 25%, meaning that any supplemental wages (including bonuses) should be taxed in that amount.
This works for bonuses up to 1 million.
> I can think of many people
Yes, there are plenty of idiots even in finance.
(It's mostly a disadvantage. I get about 60-70% of my income in bonus and stock which is treated the same; it just means that, if I don't plan ahead for it, I end up with a surprise tax bill on April 15th. I do plan ahead, but the whole process is obnoxious.)
But it's absolutely not correct that paying people with bonuses lowers their effective tax rate.
Or if your bonus is in January you can have a higher witholdings from salary and the default 25% from the bonus. Just balance it by the end of the year.
But that's just simple stuff, there are also other benefits to the company.