How to tax a bonus in Australia

Paying a bonus should be a good news story. But work out the tax wrong and you’ll either short-change your employee or leave your business exposed to an ATO correction later.

Here’s the short version: if a bonus relates to a single pay period, you add it to that period’s earnings and tax it as normal. If it covers a longer period, like an annual or EOFY bonus, you use the ATO’s marginal rates calculation under Schedule 5, and the tax withheld is capped at 47%.

This guide walks you through the calculation, with an example, plus the super, STP and salary sacrifice rules that trip employers up.

Key takeaways

• Bonuses are assessable income and must have PAYG withheld before payment
• A bonus for a single pay period is simply added to that period’s earnings and taxed using the standard tax tables
• A bonus covering multiple periods (quarterly, annual, EOFY) is taxed using a marginal rates calculation under ATO Schedule 5
• Tax withheld on a bonus under Method A is capped at 47%
• Bonuses are reported separately as “bonuses and commissions” under STP Phase 2, not lumped into gross
• Most bonuses count as ordinary time earnings, so super guarantee applies

First, what period does the bonus cover?

This is the question that determines everything else.

Single pay period. If the bonus relates purely to work performed in one pay period (a weekly, fortnightly or monthly bonus), add it to the employee’s other earnings for that period and calculate tax using the standard PAYG withholding tax table. Yes, this bumps up the tax in that one pay.

Multiple pay periods. If the bonus covers a longer stretch, taxing it all in one period would over-withhold badly. Instead, you average it using a marginal rates calculation. The ATO provides two approved approaches in Schedule 5, known as Method A and Method B. Method A is the simpler one and the most commonly used, so that’s what we’ll focus on here.

How the marginal rates calculation works

“Marginal rates” doesn’t mean the employee’s tax bracket. It means averaging the tax over the period the bonus relates to.

The idea is simple: you spread equal portions of the bonus on top of the employee’s regular pay, work out the tax difference between their average pay and their average pay plus the average bonus, then multiply that difference back up.

Step by step:

1. Work out how many pay periods the bonus relates to. For an annual or EOFY bonus, use the full financial year (52 weeks, 26 fortnights or 12 months). Watch out for years where the calendar delivers 53 weekly or 27 fortnightly pays, because your averaging needs to match your actual pay calendar.
2. Divide the bonus by that number of periods to get the average bonus per period.
3. Look up the PAYG withholding on the employee’s normal gross pay.
4. Add the average bonus to the normal gross pay and look up the PAYG withholding on that combined amount. Ignore the cents when using the tax tables.
5. Subtract the tax at step 3 from the tax at step 4. That’s the extra tax per period.
6. Multiply the extra tax per period by the number of pay periods. That’s the total PAYG to withhold from the bonus.

Example: an annual EOFY bonus

Dawson is paid weekly and earns $900 per week. He’s receiving a $9,000 annual bonus, claims the tax-free threshold and has no study loan debt. Because it’s an annual bonus, his payroll team averages the tax over the financial year.

Total PAYG on the bonus: $55 × 52 weeks = $2,860

That amount is withheld from the $9,000 when it’s paid, and Dawson’s regular weekly pay is taxed as normal.

Figures use the ATO’s weekly withholding formulas current at the time of writing. Rates and thresholds move, so check the current table, or see our guide to this year’s payroll changes, before processing.

The 47% cap

Under Method A, the tax withheld from a bonus is capped at 47% of the payment. If your marginal rates calculation produces a figure higher than 47% of the bonus, withhold 47% instead.

Checking it against Dawson: 47% of his $9,000 bonus is $4,230. The $2,860 we calculated sits comfortably under that, so no adjustment is needed. In practice the cap mainly comes into play for large bonuses paid to high earners, but it’s a quick check that’s worth doing every time.

Super and STP: two things employers get wrong

Super guarantee. Bonuses are generally ordinary time earnings, so super is payable on top. That includes performance bonuses and discretionary goodwill bonuses. The main exception, per the ATO’s ruling on ordinary time earnings, is a bonus that relates solely to work performed entirely outside ordinary hours, such as a purely overtime-based bonus. And since super now has to reach the employee’s fund within seven business days of payday, the super on a bonus can’t sit in a quarterly queue anymore. Our Payday Super guide covers what’s changed.

STP reporting. Under STP Phase 2, bonuses and commissions are reported as their own separate category, not rolled into gross. If your payroll software still maps bonuses to gross earnings, your STP reporting is out of date.

Get bonuses right first time

Bonus runs are exactly the kind of one-off payroll event where errors creep in: the wrong method, a missed cap, super not applied, STP miscoded. If you’d rather hand that to a team that processes them every week, our managed payroll services cover bonus runs, STP and super end to end. Request a quote or call us on 1300 851 133.

Frequently asked questions

Can an employee salary sacrifice their bonus?

Only if the arrangement is in place before they earn the entitlement. An employee can’t salary sacrifice a bonus once they’ve already passed the qualifying period for it. So if an EOFY bonus rewards performance across the 2026–27 financial year, the written salary sacrifice arrangement needs to be in place before 1 July 2026, not signed the week before payment. Also worth checking before anyone sacrifices a large bonus to super: the concessional contributions cap, because a big one-off sacrifice can blow through it.

An employee has a PAYG withholding variation. Does it apply to their bonus?

Only if the variation specifically covers bonuses. If the ATO variation notice doesn’t mention bonuses, the bonus is taxed at marginal rates under the normal rules. If it does, you can apply the varied rate. Each variation is assessed by the ATO on its own merits, so always check the notice itself.

What if the employee has a HELP or other study loan debt?

You’ll also need to withhold from the bonus using the relevant study and training support loans tax table, on top of the standard calculation.

What’s Method B, and when would I use it?

Method B is more complex but produces a withholding amount closer to the employee’s actual end-of-year tax. It’s typically used for back payments that relate to specific past periods or a prior financial year. Both methods are acceptable to the ATO. The full detail is in Schedule 5 on the ATO website.

At Alltech, we manage payroll for 150+ businesses across Australia – including the complexities of allowances, Awards, and superannuation compliance. Get in touch to find out how outsourced payroll works and whether it’s right for your business.
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