Taxing a bonus can be quite confusing. There are several methods to tax a bonus. There is Method A and Method B (i) and (ii).
Let’s look at Method A
Method A is a simpler calculation and the most commonly used method.
Bonuses are taxed at “marginal rates.” Marginal rates does not refer to the tax bracket that the employee’s earnings fall into!
To tax at marginal rates is to average the tax over an extended period.
- If you know the actual number of pay periods that the bonus relates to, for example a half-yearly bonus, you can use that number of pay periods in the calculation.
- If you are paying an annual bonus you can average the tax over the whole financial year.
What you are doing is effectively putting a proportion of the bonus on top of the employee’s regular pay and obtaining the tax difference between the “Average Pay” and the “Average Pay + Average Bonus”.
The difference in tax is then annualised to obtain the full amount of PAYG payable on the bonus.
Here’s an example:
Justin is a weekly paid employee earning $700 per week normal pay.
He is being paid a $8,000 bonus (average of $153.85 per week).
Justin is claiming the Tax-free threshold.
*Please note that you ignore the cents when looking up the tax tables.
The ATO guidelines provide that the amount of tax to be withheld from an bonus is capped at a maximum of 49% at the time of payment.
So you will need to compare the total PAYG calculated on the bonus using marginal rates with a flat tax rate of 49%.
If the total PAYG calculated at marginal rates is greater than 49%, then cap the PAYG at 49%.
There are another 2 methods on how to calculate a bonus which are more complex in nature. The link below will take you to the ATO page for further detailed information: