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Accounting for allowances and benefits for staff: Bonuses

Taxing lump sum payments

Lump sum payments include annual or special bonuses, cashed-in annual leave, retiring or redundancy payments, payments for accepting restrictive covenants, exit inducement payments, gratuities, or back pay. These are also called "extra pays". Overtime or any regular payments are not lump sum payments.

Note  

The PAYE rate of 11.95% applies from 1 April 2014 for those who have total taxable income of $14,000 or less.

If a lump sum is paid to a person in relation to their secondary source of income after 1 April 2011, there is a new calculation which must be used to work out the correct amount of PAYE for that payment.

Lump sum payments from primary employment

Redundancy payments and retiring allowances are not subject to ACC earners' levy.

How PAYE (tax plus ACC earners' levy) applies to lump sum payments

When the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks* is ... then PAYE applies to the whole lump sum at a flat rate of ...
$14,000 or less 11.95 cents in the dollar.
from $14,001 to $48,000 18.95 cents in the dollar.
from $48,001 to $70,000 31.45 cents in the dollar.
greater than $70,000, but less than the ACC earners' levy maximum threshold of $118,191 (for the 2015 tax year) 34.45 cents in the dollar.

You can also apply PAYE at 34.45 cents in the dollar when the employee asks you to use this rate.

* To calculate the grossed-up annual value of the employee's income:

  • add up the PAYE income payments for the four weeks ending on the date of the extra payment, whether this is the normal pay cycle or not, and
  • multiply by 13.

The amount of the extra pay is not included in this total.

How tax (no ACC earners' levy) applies to lump sum payments

When the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is greater than the ACC earners' levy maximum threshold of $118,191 (for the 2015 tax year) then PAYE applies to the whole lump sum at a flat rate of 33 cents in the dollar.

Note  

ACC earner levy and residual earner levy do not apply to retiring or redundancy payments. These should have PAYE applied at 10.5%, 17.5%, 30% or 33%, according to annualised income.

If the lump sum has PAYE applied using the lowest rate (11.95%), tick the box on the Employer monthly schedule (IR348) to show this.


 

Example  
You're going to pay a bonus payment of $400 to one of your employees. The employee's gross earnings for the last four weeks were $2,500. The calculation will look like this:

Annualised income (13 x $2,500) $32,500
plus the bonus payment $400
Total

$32,900


In this example, the income level is less than $48,000, so the PAYE rate applied to the bonus payment is 18.95% (18.95 cents in the dollar).

Student loan repayments and KiwiSaver deductions

If the employee uses a student loan tax code (M SL, ME SL) then you'll also have to deduct student loan repayments. Add any gross salary or wage payments for the same period to the gross lump sum amount and deduct the pay period threshold, eg, $367 a week.  The remaining amount will have student loan deductions made at the standard deduction rate of 12 cents in the dollar.

Example  

You're going to pay a bonus payment of $1,000 to one of your employees.  The employee's gross earnings are $546 weekly. 

Weekly gross wages

$   564

plus bonus payment

$1,000

Total payment for the week

$1,564

minus weekly pay period threshold

$  367

Total

$1,197

Student loan deductions (12% of $1,197)

$143.64


 

Note/Example  
If the employee is a KiwiSaver member then you'll need to deduct contributions from lump sum payments.

Lump sum payments from secondary employment

A new calculation for calculating the amount of PAYE to apply to lump sum payments has been introduced. The new calculation takes into account the minimum level of income the employee expects to receive from their primary employment, based on the secondary tax code they have selected.

The new calculation

The calculation for the amount of PAYE on an extra pay for employees using a secondary tax code is:

Amount of the extra pay
plus annualised income*
plus the low threshold amount, (based on the secondary tax code used as in Table 1)
equals the annual income estimate.

*Annualised income is calculated by adding up the PAYE income payments for the four weeks ending on the date of the extra payment, whether this is the normal pay cycle or not, and multiplying by 13. The amount of the extra pay is not included in this total.

Table 1: Low threshold amounts

Tax code Low threshold amount
SB

$0

S

$14,001

SH

$48,001

ST

$70,001

Table 2: Income range and PAYE rates

Annual income estimate (from the calculation above) PAYE rate (including 1.45% ACC earners' levy) Student loan
$0 - $14,000
11.95%
plus 12%
$14,001 - $48,000
18.95%
plus 12%
$48,001 - $70,000
31.45%
plus 12%
over $70,000
34.45%
plus 12%

Making the calculation

If the annual income estimate is less than $118,191* then the amount of PAYE on the full extra pay should be calculated using the rate shown in Table 2 (above).

If the annualised income plus the low threshold amount is .. then ...
greater than $118,191* none of the extra pay is liable for ACC and the PAYE rate is 33%.
lower than $118,191*, but the annual income estimate exceeds $118,191

the amount of PAYE applied to the extra pay that:

  • falls below the threshold is calculated at 34.45%
  • is above the threshold has PAYE applied without the ACC earner levy (ie at 33%). See the example below.

* The maximum amount of earnings on which an ACC earners' levy and earners' account residual levy is payable for the year ending 31 March 2015.

Example
Jane has a second job and uses the ST tax code. Jane's secondary employer wants to pay her a one-off bonus of $15,000. In the last four weeks Jane has earned $2,695 from her second job.

Applying the calculation above, Jane's employer can work out the amount of PAYE on her bonus:

Annualised income ($2,695 x 13) $35,035
plus low threshold amount (based on ST, Jane's secondary code from Table 1) $70,001
equals $105,036
plus the amount of the extra pay $15,000
Annual income amount $120,036
 
The annualised income plus the low threshold amount is below the threshold of $118,191. But when the extra pay is added, the annual income estimate exceeds $118,191, so the ACC earner levy should only be applied to earnings below the threshold.


 

In the following calculation the PAYE has been calculated on the full bonus at 34.45%, and then the over-deducted ACC has been subtracted.

Calculation
 
$15,000 x 34.45% = $5,167.50
Annual income estimate - ACC threshold = extra pay not liable for ACC

$120,036 less $118,191 $1,845
$1,845 x 1.45% $26.75
$5,167.50 less $26.75 $5,140.75
Amount of PAYE applied to the extra pay $5,140.75

 

 


Date published: 28 May 2014

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