Bonuses
Bonuses are irregular payments made to employees usually for reward.
There are two types:
- Bonuses paid for work performance
- Bonuses not related to work performance
Work performance related bonuses
Amounts paid directly relating to any work performed attacts superannuation (the employer
has to pay superannuation on it),
that is, it is included in an employee's earnings base. Commissions are included
in this group.
Bonuses NOT related to work performance
One off payments such as Christmas bonuses are not considered part of the employee's
earnings base and therefore do not attact superannuation.
Calculating tax on Bonuses
Taxing bonuses works on the principle of 'average out' the amount over the year to date.
This is because one-off bonuses can be large amounts that could shoot an employee into
a higher tax bracket if the bonus amount were added directly to the taxable income for one pay.
This point is best demonstrated by an example.
Supposing you receive a Christmas bonus of $10,000 at the end of the year. Your normal weekly
income is $1000. Adding your bonus directly to your taxable income would mean that you would
have to pay tax on $11,000 for that pay. This might be okay for small amounts but it might be
more tax than you have to pay for your total years taxable income.
If we average out the amount over each period to date (52 weeks in this example) we can
more accurately determine the tax paid on the bonus.
Example
George is paid $1000 gross, weekly. His weekly tax bill is $200.
Because he has been working very hard,
he is paid a Christmas bonus of $10,000.
- Calculate the total year to date taxable income: $1000 * 52 weeks = $52,000
(there may have been other allowances/bonuses paid but in this case there was not)
- Calculate the tax paid for one pay period: Tax on $1000 ($52,000/52 weeks) = $200.
- Add the total taxable income for the year and the bonus amount = $52,000 + $10,000 = $62,000
- Calculate the tax paid for one pay period on the above amount: Tax on $1192.31 ($62,000/52 weeks) is say..$220
- Calculate the diffence is tax paid in step 2 and 4: $220 - $200 = $20.
- Multiply the tax difference above by the number of periods to date: $20 * 52 weeks = $1040
So the tax paid on the bonus amount is $1040.
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