Consider your timing when paying Bonuses to Employees


While most businesses in Australia are dealing with losses and the risks of the unknown in the future, there are some industries and businesses that are either business as usual or are benefiting from shifts in consumer behaviour and are seeing good business results. In this case you may want to pay your employees a bonus.

What is a bonus?

A bonus is a form of compensation that isn’t guaranteed. It is usually paid on the completion of an event such as a payment of reaching a sales result or goal. This can work well from a management perspective as it can be a huge incentive to employees to achieve the desired business results.

From a tax perspective some other once-off lump sum payments will be handled similarly to a bonus. These include a once-off payment for moving locations, a sign on bonus on joining an organisation or a lump sum allowance.

How do you apply tax?

Bonuses paid are taxed. However, you do need to consider a few things when applying tax. If the work associated with the bonus occurred in a single pay period then it should be taxed as normal in that pay period. However, if the bonus is for work performed over a longer period of time such as throughout the year you will need to calculate that out differently. You need to choose either method A or method B as per the ATO.

Method A is used for additional payments made regardless of the financial year that the apply to. These include things like back payments, commissions or bonuses. So for instance if you are paying a bonus in July or August for performance that occurred in the previous financial year.

Method B is more complex but it does produce a withholding amount that is more closely aligned with what the employees real tax obligation will be. This means that there will be little variance for the employee on doing their tax return.

Tax Table for Paying Bonuses

The ATO has produced a Tax table for paying bonuses that you may find useful.

Which tax year should I pay the bonus?

You need to consider the tax implications of the bonus payment both on your business and on the employee when deciding when to pay the bonus. If you need help with tax planning we have tax specialists at Azure Group who can help you plan your bonus payments to meet the needs of your business and employees.

Related: How will COVID-19 affect your End of Financial Year Tax return?

Have you noticed our #EOFYTaxTips... here's one that relates to #Taxation

“If you are looking to reward and incentivise your key employees, planning an Employee Share/Options Scheme near year end has cost savings for your business.”


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About Author

Azure Group
Azure Group

Azure Group is the leading Chartered Accounting, Business Advisory and Strategic Advisory firm supporting the growth & success of fast growing entrepreneurial businesses.

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