Receiving a bonus payment from an employer as a reward for your hard work is always appreciated. Even though some may view this payment as ‘other’ than your normal wage, it is still considered taxable income by the ATO. Not only will employers need to declare it, so will employees who receive a lump sum bonus payment.
Bonus payments may be rewarded for employee performance, for example – consistently meeting KPI’s or sales targets. These payments might also be paid to employees as a gift from their employer, either for the holidays or as a sign-on bonus.
The taxes that may apply to your bonus payment will depend on different circumstances, including:
– the amount
– the pay period
– whether or not it is classed as a gift
A bonus payment may be recognised as a gift if the amount is under $300, and if the gifts are infrequent. Employers are not required to withhold tax, pay superannuation, or record these gift payments on the employee’s payment summary at the end of the financial year. Though if you’re an employee receiving these payments, you may be required to declare it as income.
For larger bonus payments, all ordinary tax obligations (such as PAYG and superannuation) apply.
If you’re a US citizen or Green Card holder, all your Australian income and bonuses need to be declared on your US tax return, too.
Bonus Payment Tax for Employers:
– Payroll Tax
Employers must record bonus payments given to employees in their payment summary, or individually in their PAYG withholding statement. The ATO recognises bonus payments the same way they do wages. So just like ordinary wages, these payments are liable to payroll tax.
– PAYG Withholding
Any extra payments that employees receive will also be liable to bonus tax, so the necessary amount will need to be withheld from the payments. These bonus payments are generally paid out annually at the end of the financial year. This should be accounted for when deciding to award your employees with a bonus payment.
There are two methods provided by the ATO to help employers calculate and determine the amount that will need to be withheld on these bonus payments. Whether you use Method A or Method B, the amount of tax to be withheld from additional payments is capped at 47%. If the withholding amount calculated by either of these methods exceeds 47%, the amount is then reduced to be equal to the capped percentage.
You may use either method to calculate the withholding amount. Though Method B is more complex, it produces a closer approximation to the actual tax payable. If either method produces a calculation resulting in a negative amount, you can treat the result as nil.
The detailed explanation of these methods and relevant tax tables are available on the ATO’s website, but we will give a general overview.
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This method calculates the withholding amount by dividing additional payments made over a number of pay periods in the financial year – and then applying that average amount to the gross earnings in the current pay period.
There are a few steps to Method A, but we give you a brief explanation down below:
- Find the relevant tax table that applies to your employee and work out the standard amount of tax you would withhold from a pay period for their usual wage.
- Divide the total amount of the bonus payment by the number of pay periods it applies to. If it’s a one-off bonus payment at the end of the financial year, and the employee is paid weekly, you would divide the bonus by 52 (52 weekly pay periods in a year).
- Take the sum of the divided amount and apply it to the regular wage of the employee. If the employee earns $1000 per week, for example, and the divided sum of the bonus payment for that pay period is $100 – that would take the earnings for the pay period to $1100.
- Then use the relevant tax table to figure out how much tax needs to be withheld from the total sum of the regular income plus the bonus.
- Subtract the sum from the first step from the amount in step four.
- Multiply that figure by the number of pay periods the bonus applies to, this will give you the tax deduction on the additional payment.
When calculating these figures, don’t include cents, and don’t round up to the next dollar.
There are two ways to calculate tax withholding using Method B.
Method B(i) is used for any back payments that have been applied to specific pay periods in the current year.
Method B(ii) is used for either back payments that apply to the previous financial year, or to any additional payments that don’t relate to any single pay period – such as bonus payments.
As stated above, Method B(ii) is a little more complicated, but it does produce a more accurate amount to withhold.
The steps in this method are detailed more below:
- Calculate your employee’s average total earnings over the current financial year to date (again, disregard the cents).
- Use the appropriate tax table to calculate the amount to be withheld from their average earnings.
- Add all bonus payments paid (or to be paid) to the employee together and divide the sum by the number of pay periods in the financial year (52 weekly, 26 fortnightly, 12 monthly).
- Add the sum from step three to the employee’s average earnings for each pay period.
- Take the total from step four and use a relevant tax table to calculate the amount to be withheld.
- Subtract the amount from step two from the amount at step five.
- Multiply that figure by the number of pay periods within the financial year.
- Subtract any previously withheld amounts from bonus payments made throughout the year.
- Multiply the additional bonus payment being made in the current pay period by 47%.
- Take the lesser amount from step eight and nine for the withholding sum, and use the relevant tax table to calculate the amount to be withheld from the employee’s gross earnings (excluding the additional payment).
- Work out the total tax to withhold for the pay period by adding the withholding on the bonus payment to the withholding on the employee’s gross earnings.
Either of these methods is an acceptable way to calculate the tax that needs to be paid and accounted for on any bonus payments awarded to employees. Though it sounds a little complicated, there are tools and calculators available to help make the process of figuring out bonus payment tax easier.
For a full list of instructions, plus the tax tables that you will need to reference, you can visit the ATO website.