Accounting for allowances and benefits for staff: Bonuses
Taxing lump sum payments
Definition
Lump sum payments paid annually or as special bonuses cover:
- retiring or redundancy payments
- gratuities
- backpay
- restrictive covenant or exit inducement payments.
These are known as extra emolument payments.
How lump sums are taxed
These are the steps to work out the tax on an employee's lump sum:
- Start with the employee's regular salary/wage for the last four weeks
- Multiply that by 13 to get a full year's income (52 weeks)
- Add any holiday pay that was paid in the last four weeks
- Add the lump sum, to get the full year's income
- Tax the lump sum according to this full year income amount.
| Note | |
|---|---|
| If your employee uses a student loan tax code, you will have to deduct student loan repayments from the bonus. | |
Tax rates
There are three different tax rates for lump sums, based on the grossed-up annual value of the employee's income. The ACC earner levy is added to these, except where:
- the lump sums are retiring or redundancy payments
- the employee's combined earnings, including all or part of the lump sum, exceed or are likely to exceed the ACC earners' levy maximum liable income.
| Full year income for period ending 31 March 2010 | Tax rate | ACC earner premium |
|---|---|---|
| Up to $48,000 | 21% | 1.7% |
| $48,001 to $70,000 | 33% | 1.7% |
| $70,001 upwards | 38% | 1.7% |
Find out more
See Rates of levy and maximum liable income
| Note | |
|---|---|
| If the lump sum is taxed using the lowest rate (21 cents in the dollar), tick the box on the Employer monthly schedule (IR348) to show this. | |
| Note | |
|---|---|
| The independent earner tax credit is not included in lump sum payment calculations. | |
| Example | ||
|---|---|---|
| You pay a bonus of $400 to an employee. Their gross earnings for the last four weeks were $2,500. The calculation will look like this: | ||
| Annual income (13 x $2,500) | $32,500 | |
| Add the bonus payment | $ 400 | |
| Total | $32,900 | |
| As the income is less than $48,000 the tax rate is 22.7 cents in the dollar | ||
Employees can elect a higher tax rate
Employees can elect to have any lump sums taxed at a higher rate. They may choose to do this if, for example, they have another job or other untaxed income such as rent. They should tell you if they want to use a higher rate.
Date published: 13 Mar 2009
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