Back pay
Back pay refers to any payments for work which was performed in the past for which the employee
hasn't already been paid. There are two cases
for back pays, each are taxed differently:
- Back pay for work performed within the last 12 months of the payment date
- Back pay for work performed greater than 12 months ago.
Taxing back pay for work performed less than 12 months ago
Back pays in this case are treated the same as a performance related bonus.
The amount paid appears under 'Gross Payments' in the end of year payment summary.
Example
Jill is paid monthly. For the month of August she is paid $4020 in normal earnings.
Her monthly tax bill is $900.
She is also back paid $1000 for earnings made last November.
Perform the following steps
- Calculate her taxable income for the financial year so far: $4020 * 2 months = $8040
- Calculate the tax paid for 1 pay period,ie tax on $4020 ($8040/2 months) = $900.
- Add taxable income and the back pay amount: $8040 + $1000 = $9040
- Calculate the tax from above for 1 pay period ie tax on $4520($9040/2 months) = $950
- Calculate the difference in tax paid in step 2 and step 4 = $950 - $900 = $50
- Multiply this difference by the number of pay periods so far: $50 * 2 months = $100
Therefore, the amount of tax paid on the back pay amount is $100.
The $1000 in back pay is added to the gross amount in the end-of-year payment summary.
Taxing back pay for work performed more than 12 months ago
Back pays for work performed greater than 12 months ago from the payment date are
taxed at a flat rate of 21.5%. The amount paid appears under Lump Sum E in the
end of year payment summary.
Example
Jack is paid $2050.56 in back pay for work performed 18 months ago. In addition to
his normal tax he will have to pay $2050.56 * 21.5% = $429 (rounded up) on the back pay amount.
Employees should be provided details of backpayments along with the end-of-year
payment summary. Details should include amounts and relevant dates of the payment.
This will assist the tax office in correctly calculating the return.
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