Whether you’re providing a bonus payment as a small business employer or receiving a bonus payment as an employee, it’s crucial to know what taxes will apply.
The taxes that apply to employee bonus payments depend on factors including the amount, the payment period and whether the bonus payment is a gift. The taxes that can apply to bonus payments include payroll tax, PAYG withholding, and others
If you want to know the tax implications of bonus payments for employers and employees, read along!
Table of Contents
What are employee bonus payments?
Employee bonus payments are lump sum payments provided to employees by their employers.
The primary purpose of bonus payments is for employers to reward employees based on their performance.
For example, a bonus payment may be given to an employee who has met their targets over a certain period.
Primary Tax Considerations for Employers
Payroll tax
As an employer, when you provide your employee with a bonus payment, the payment can be reflected in their Pay As You Go (PAYG) payment summary as salary and wages.
It can also be included individually under their PAYG withholding statement.
The Australian Tax Office(ATO) treats bonuses paid to employees the same as wages. Therefore, bonus payments are liable for payroll tax.
The amount of payroll tax you pay depends on the location of your business and whether your business exceeds the payroll tax threshold.
For example, in NSW, the current payroll tax rate is 4.85% for businesses exceeding the payroll tax threshold of $1,200,000 annually.
Whereas the current payroll tax rate for employers in QLD is 4.75%, and the current threshold is $1,300,000 annually.
PAYG withholding
The bonus payment you provide your employee will typically relate to their performance over several pay periods. Typically employee bonuses are awarded on an annual basis at the end of the tax year or the year’s end.
The payment you provide your employee will have bonus tax applied to it. Therefore, you should be withholding tax on bonus payments.
The ATO provides two tax calculation methods to determine the withholding amount.
These are Method A and Method B.
Method A
To withhold tax through Method A, use the following steps:
- Use the relevant PAYG tax table to work out the regular amount you would withhold from an employee during a single pay period
- Divide the bonus by the number of pay periods it relates to. For example, if it’s an annual bonus and you pay wages monthly, there are 12 pay periods
- Reduce any cent amount on your calculation to zero and don’t round up to the next dollar
- Add the bonus amount for one pay period on top of the regular earning amount for a single pay period. For example, if normal earnings are $2800 and the bonus for one pay period is $200, this equals $3,000
- Use the relevant tax table to determine the amount to withhold from the combined regular income and bonus
- Subtract the amount in step 1 from the amount in step 5
- Multiply the result by the number of pay periods the bonus relates to, so you can determine the tax deduction on the bonus
Method B
Method B is more complicated, however, it produces a withholding amount that’s closer to what the employee’s actual tax liability is. Therefore, the employee won’t have much variance when lodging their tax return.
Method B uses the following steps:
- For the current pay period, calculate your employee’s gross income. You must exclude any additional pay and disregard cents from it
- To figure out how much to withhold from your employee’s gross wages from step 1, use the correct tax table
- For the current pay period, add all the extra payments that are due and divide it by the number of pay periods during the financial year. You must disregard cents from this total. In the financial year, there are 12 monthly pay periods, 26 fortnightly pay periods and 52 weekly pay periods
- Now add the gross income from step 1 to the total from step 3
- To figure out how much to withhold from the amount at step 4, use the correct tax table
- The total from step 2 must be subtracted from the amount in step 5
- Use the number of pay periods from step 3 to multiply the total from step 6
- The current pay period’s extra payment must be multiplied by 47%
- From the amounts calculated in steps 7 and 8, choose the smaller amount to withhold from the extra payment. Don’t worry about cents
- Add the amount withheld from the additional payment in step 9 to the amount you withheld from the employee’s gross wages in step 2 to calculate the current pay period’s total PAYG withholding
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Other Tax Considerations
1. Superannuation guarantee
As an employer, you’re required to pay a superannuation guarantee on all ordinary hours worked by your employees, minus unscheduled overtime hours.
Therefore, you must pay your employees a superannuation guarantee on their gross bonus payments.
As a result, you might need to adjust the bonus payment you’re awarding your employee to make sure the bonus they receive is the net amount.
These rules regarding bonuses apply to all employees, including casual, full-time or part-time. Contractors might also be subject to these rules.
2. Gift bonus payments
If your employee’s bonus payment is below $300, it can be recognised as a gift.
You may be provided with an exemption from fringe benefits tax( FBT) if the bonus is recognised as a gift. This is only if it’s an infrequent gift and you meet the other requirements.
For these gifts, you’re not required to be withholding tax or recording the bonus on the employee’s yearly PAYG payment summary and pay superannuation to their fund.
Regarding large bonus payments, you must meet your obligations as an employer. PAYG and superannuation rules apply for all bonus payments except for hours worked overtime.
Employee bonus payments – for employees
Your taxable income includes bonuses. Your annual payment summary will reflect whether your employer withheld the right amount of tax.
Frequently asked questions (FAQs)
How to ensure your employee receives the total bonus payment?
For instance, if you’re trying to award your employee with a bonus of $2000, you might have to provide them with a somewhat larger payment to cover the taxes you’ll need to deduct.
Will receiving a bonus payment put me in a higher tax bracket?
Employees must be aware that receiving bonus payments could put them in a higher tax bracket and impact their eligibility for government benefits.
Do you have to give employees a bonus as an employer?
You’re not required to provide your employees with bonus payments.
What happens when employers don’t meet their obligations regarding PAYG withholding obligations on payments made to employees?
Failure to meet these obligations can result in losing your entitlement to a tax deduction for the payment. Penalties could apply as well due to a failure to report amounts under the PAYG withholding system and to withhold tax.
Key Takeaways
It is essential for employers and employees to know what tax applies to bonus payments to benefit from the payments and meet your obligations relating to them.
If you’re still unsure about what taxes apply to employee bonus payments and require further advice you should speak to an income tax lawyer.
