Bonuses are commonly used as staff incentives, but there is often confusion about how to process the tax on bonuses paid.
There are two types of bonuses:
- Ones that are paid periodically and should be included in the employee's gross earnings.
- These must be set up as Gross Earnings pay codes.
All amounts paid to employees as part of their agreements or paid periodically must be included in their Annual Leave and Holiday Pay calculations.
Gratuitous or discretionary bonuses
- These amounts would not be included in the employee's Annual Leave and Holiday Pay calculations.
- These bonuses need to be set up as a Taxable Allowance pay code.
To pay bonuses to your employees, create a new pay code then add the new pay code to the employee's pay.
For more information on the tax implications of bonus payments, refer to your accounting advisor or the IRD.
- Go to the Maintenance command centre and click Maintain Pay Codes.
- Create a New Pay Code called Bonus with the Description Bonus Pay.
- Depending on the type of bonus select either:
- Gross Earnings for a bonus that is paid periodically, OR
- Taxable Allowance for a "one off" bonus.
- Click OK.
- Click the General tab.
- Select the Allow the rate to be modified option.
The code probably won't be based on any particular rate so it's recommended you choose to allow the rate to be modified so it is easy to use in the future.
- Go to the Prepare Pays command centre and click Enter Pays. The Enter Pays window is displayed.
- Double-click the applicable employee. The Enter Pay Details window is displayed.
- Add the newly created Bonus pay code to the employee's pay:
- Click Add Default as shown below.
- Select the BONUS pay code from the list.
- Click OK. The Set new Pay Default details window is displayed.
- Click OK.
- Enter the bonus amount against the Bonus pay code in the Rate column, and enter 1.00 in the Quantity field.
- Click OK.
Dealing with tax on gratuitous bonuses involves adjusting an employee's tax with a Tax Override.
- In the picture below a bonus of $1500 has been entered. Click into the PAYE Rate column, this will make the Tax Override button available.
The TAX (PAYE) at this point in the example below is $694.19.
- Click Tax Override.
- Enter the bonus amount in the Extra Pay Amount box. If you know the net amount, use the PAYE Calculator as detailed below.
- Select the required Tax Code in other words SB, S, SH, or ST. See the thresholds below. If you require more information, visit the IRD website.
The tax code will depend on the employee's expected annual income for the year.
SB: $0 to $14,000 inclusive
S: $14,001 to $48,000 inclusive
SH: $48,001 to $70,000 inclusive
ST: more than $70,000
In the example below the employee is expected to earn between $48,001 and $70,000 so the tax code 'SH' has been chosen.
- If this Extra Pay is due to an employee's retirement or redundancy, select the Extra Pay is exempt from ACC Earner levy option.
- Click OK. The TAX (PAYE) rate is now over-ridden accordingly as shown in the example below, in other words the tax has been reduced to $666.76.
If the employee uses an M SL, ME SL, ML SL, S SL, SB SL, SH SL or ST SL tax code, you must deduct student loan repayments from the bonus.
Occasionally, you may have the requirement to pay out an Extra Emolument amount (perhaps a bonus) where you are given the net amounts only. In this case the manual calculation of tax is difficult.
To overcome this problem, your software has a PAYE Calculator where you can enter a net amount to calculate the gross amount.
When using this tool, make sure you use the correct tax code as shown above.
To use the PAYE Calculator:
- Go to the Tools menu and choose PAYE Calculator.
- Select the applicable TAX Code - refer above for guidance.
- Enter the net amount you wish to pay in the Net Pay field.
- Click outside the Net Pay field (or press the Tab key). The gross pay (Total Earnings) and PAYE values will be calculated and displayed.
What about student loans and KiwiSaver calculations?
Student loan and KiwiSaver deductions are calculated on the employee's total gross wages - which includes bonuses.