If you pay bonuses or commissions to your employees, you'll know how tricky they can be to calculate. We discuss best practices in processing commissions and bonuses through payroll
If so, it's important to make sure you are calculating their tax correctly based on how and why you are paying the employee additional monies. As an employee, there's nothing worse than receiving a little bit extra at work, only to see most of it disappear to taxes!
Types of Payments
The main types of payments that may be taxed differently than regular payroll are bonuses (sign-on or annual) and commissions. Specific instructions for calculating taxes on these payments can be found here, but if you find these instructions confusing, using accounting software like Xero can be a great help. Xero can be easily configured by your accountant or you to calculate the proper withholding for these types of payments.
How to Calculate
A few characteristics of the payment can influence how the tax should be calculated. Bonuses are paid to reward employees for their good work, and they are taxed like normal income-if the payment is for work that happened in a single pay period. If the bonus is for work performed throughout the year, you must use this table to determine withholding.
Commissions are usually paid to recognize specific work performance or even as a percentage of a particular sale or service. Like a bonus, commission earned in a single pay period is taxed normally. But if the commission is for a specific time outside of a single pay period, you can use this table to calculate how much tax to withhold.
The ATO does provide a second way to approach commissions and, since you'll probably be paying your employees commissions more than once or twice a year, the best way to calculate their tax may be the progressive method. In this method, your calculations are based on an estimate of what the employee will receive over the year, so the amount withheld will be more accurate. Using the progressive method reduces the risk that the employee will be surprised by a large tax liability at the end of the year. And since the amount withheld can be adjusted from commission check to commission check, any potential decrease or increase in the amount of commission being earned can be accounted for throughout the year.
Calculating the tax on your employees' annual bonuses and commissions properly goes a long way toward building good will throughout the year! If you have questions on either tax table or on Xero in general, contact us here.