Ph: 0422 311 350

Sometimes hard work really does pay off and if you've recently received a bonus at work then congratulations to you!

There are lots of tax considerations when it comes to getting a one-off bonus. For instance, it can push a PAYG employee's pay packet into a higher tax bracket and incur paying too much tax. So how can we calculate the tax properly and not pay too much tax when we get a bonus?

Let's look at an example to explain the problem. For 2014/2015 financial year, a PAYG employee earning $2,500 per fortnight (i.e. $65,000 annual salary) is on a normal fortnightly tax rate of $540 and gets a bonus of $10,000. If we are using normal payroll calculations for their pay, this person will pay $4,972 extra tax as part of the $10,000 bonus.
 
For tax purposes the ATO allows bonuses to be calculated and spread across the whole tax year and that way you can keep your PAYG in the lower tax bracket. If we calculate in this way, the employer only needs to withhold $3,432 tax from the $10,000 bonus. By doing it this way the employee can get their full bonus amount after tax when they earned the bonus. So in this example , they can have $1,540 (=$4,972 - $3,432) more net bonus payment.
 
If you are interested the detailed calculation steps are as follows:

  1. Divide the bonus $10,000 by the number of pay period to which it relates, e.g. 26 fortnights.
  2. Add the amount $384 (=$10,000 / 26 fortnights) to the normal earning $2,500.
  3. Use the normal tax table to determine $672 tax to withhold one the combined payment amount $2,884 (=$384 + $2500).
  4. Subtract the normal fortnightly tax rate $540 from the calculated tax $672 equals $132.
  5. Multiply the difference $132 by the number of pay periods, i.e. 26 fortnights is $3,432 total tax amount on the bonus.

Fortunately, whether the tax from your bonus payment was deducted correctly or not, at the end of the financial year you can claim back any money in excess of what you would owe the ATO. However, the above method increases your cash flow by putting your full bonus in your pocket now.