Accounting for allowances and benefits for staff: Bonuses

Taxing lump sum payments

• Lump sum payments from primary employment
• Lump sum payments from secondary employment

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 12.54% applies from 1 April 2011 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	12.54 cents in the dollar.
from $14,001 to $48,000	19.54 cents in the dollar.
from $48,001 to $70,000	32.04 cents in the dollar.
greater than $70,000, but less than the ACC earners' levy maximum threshold of $111,669 (for the 2012 tax year)	35.04 cents in the dollar.

You can also apply PAYE at 35.04 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 $111,669 (for the 2012 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 (link to appropriate page). 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 (12.54%), 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 19.54% (19.54 cents in the dollar).

Student loan repayments and Kiwisaver deductions

If the employee ...	then you'll ...
uses a student loan tax code (M SL, ME SL, S SL, SH SL or ST SL)	also have to deduct student loan repayments.
is a KiwiSaver member	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 2% ACC earners' levy)	Student loan
$0 - $14,000	12.54 %
$14,001 - $48,000	19.54 %	plus 10% for every dollar over $19,084
$48,001 - $70,000	32.04 %	plus 10%
over $70,000	35.04 %	plus 10%

Making the calculation

If the annual income estimate is less than $111,669* then the amount of PAYE on the full extra pay should be calculated using the rate shown in Table 2 (above).

If the the annualised income plus the low threshold amount is ..	then ...
greater than $111,669*	none of the extra pay is liable for ACC and the PAYE rate is 33%.
lower than $111,669*, but the annual income estimate exceeds $111,669	the amount of PAYE applied to the extra pay which: falls below the threshold is calculated at 35.04% 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 2012

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 $10,000. 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 $10,000 Annual income amount $115,036
The annualised income plus the low threshold amount is below the threshold of $111,669. But when the extra pay is added, the annual income estimate exceeds $111,669, 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 35.04%, and then the over-deducted ACC has been subtracted.

Calculation
$10,000 x 35.04% = $3,504 Annual income estimate - ACC threshold = extra pay not liable for ACC $115,036 less $111,669 $3,367 $3,367 x 2.04% $68.68 $3,504 less $68.68 $3,435.32 Amount of PAYE applied to the extra pay $3,435.32

 

 

Date published: 18 Apr 2011

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