Written by
Ilyas Omari
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Whether you’re providing a bonus payment as a small business employer or receiving a bonus payment as an employee, it’s crucial to know what taxes will apply.
The taxes that apply to employee bonus payments depend on factors including the amount, the payment period and whether the bonus payment is a gift. The taxes that can apply to bonus payments include payroll tax, PAYG withholding, and others
If you want to know the tax implications of bonus payments for employers and employees, read along!
What are employee bonus payments?
Employee bonus payments are lump sum payments provided to employees by their employers.
The primary purpose of bonus payments is for employers to reward employees based on their performance.
For example, a bonus payment may be given to an employee who has met their targets over a certain period.
Primary Tax Considerations for Employers
Payroll tax
The Australian Tax Office (ATO) treats bonuses paid to employees the same as wages. Therefore, bonus payments are liable for payroll tax.
The amount of payroll tax you pay depends on the location of your business and whether your business exceeds the payroll tax threshold for the relevant state.
PAYG withholding
As an employer, when you provide your employee with a bonus payment, the payment can be reflected in their Pay As You Go (PAYG) payment summary as salary and wages.
It can also be included individually under their PAYG withholding statement.
An employee’s bonus will typically relate to their performance over several pay periods. Typically employee bonuses are awarded on an annual basis at the end of the tax year or the year’s end.
The payment will have bonus tax applied to it. Therefore, you should be withholding tax on bonus payments.
The ATO provides two tax calculation methods to determine the withholding amount. Follow the instructions on their website.
Other Considerations
Superannuation guarantee
As an employer, you’re required to pay a superannuation guarantee on all ordinary hours worked by your employees, minus unscheduled overtime hours.
Therefore, you must pay your employees a superannuation guarantee on their gross bonus payments.
As a result, you might need to adjust the bonus payment you’re awarding your employee to make sure the bonus they receive is the net amount.
These rules regarding bonuses apply to all employees, including casual, full-time or part-time. Contractors might also be subject to these rules.
Gift bonus payments
One way of reducing your employee’s tax liability for a small bonus is to give it to them as non-monetary gift.
If the gift is valued below $300, it may be provided with an exemption from fringe benefits tax (FBT). This is only if it’s an infrequent gift and you meet the other requirements.
For these gifts, you’re not required to be withholding tax or recording the bonus on the employee’s yearly PAYG payment summary and pay superannuation to their fund.
Employee bonus payments – for employees
Your taxable income includes bonuses. Your annual payment summary will reflect whether your employer withheld the right amount of tax.
Frequently asked questions (FAQs)
How to ensure your employee receives the total bonus payment?
For instance, if you’re trying to award your employee with a bonus of $2000, you might have to provide them with a somewhat larger payment to cover the taxes you’ll need to deduct.
Will receiving a bonus payment put me in a higher tax bracket?
Employees must be aware that receiving bonus payments could put them in a higher tax bracket and impact their eligibility for government benefits.
Do you have to give employees a bonus as an employer?
You’re not required to provide your employees with bonus payments.
What happens when employers don’t meet their obligations regarding PAYG withholding obligations on payments made to employees?
Failure to meet these obligations can result in losing your entitlement to a tax deduction for the payment
Penalties could apply as well due to a failure to report amounts under the PAYG withholding system and to withhold tax.
Key Takeaways
It is essential for employers and employees to know what tax applies to bonus payments to benefit from the payments and meet your obligations relating to them.
If you’re still unsure about what taxes apply to employee bonus payments and require further advice you should speak to an income tax lawyer.
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