Bonus pays are subject to a special tax rule called Extra Pay. It's not the same as the employee's normal tax rate and can quite often seem to be taxed at a much higher rate than expected (see this explanation of tax rules in New Zealand)
A bonus may be paid:
- with the employee's regular pay (this is the easiest and preferred method to produce the correct amount of tax per IRD rules), or
- as a separate pay (involves more effort on your part)
Another twist is that an employer might decide the payment should be:
- a gross amount (e.g. $500 before tax), or
- a net amount ($500 after tax)
Each of these topics is explained below.
BONUS or XMAS allowance code
Your payroll is delivered with a BONUS code already set up (though we've noted the settings are often changed from the default, or the code has been deleted...)
The Bonus allowance code should be set up to use the Extra Pay tax rule, and can optionally be flagged to be excluded from Holidays Act calculations (this is permitted for ex-gratia bonus payments, it is NOT permitted for a regular or productivity bonus - you need to be aware of the difference).
The method of calculation should also be set to Units x Rate (as a pay that covers multiple periods would automatically multiply the bonus amount - something that is seldom desirable).
Sometimes it's easier to have a separate XMAS Bonus set up to make it distinct from a regular bonus or productivity payment.
Paying a Gross (pre-tax) bonus
Simply add the BONUS (or XMAS) entry to the employee's Allowances section (e.g. 1 unit of $500)
Paying a Net bonus
Add the BONUS (or XMAS) entry AFTER all other pay entries. If the method of calculation used in the BONUS code is Units x Rate then make sure you enter 1 unit. Then, click the Net Pay Wizard and enter the amount of the net Bonus (e.g. $500). SmoothPay will calculate the grossed-up value (e.g. $850) automatically so that the employee receives an extra $500 net pay.
Paying a bonus with the employee's regular pay
Simply add the BONUS (or XMAS) entry to the employee's Allowances section.
TIP: Do not save the employee's standard pay with a bonus payment included, otherwise it'll keep appearing in each following pay until you correct it.
A separate bonus pay run
This method is NOT RECOMMENDED as it's too easy to undertax the employee and involves a number of additional steps that can easily go pear-shaped. However...
- Set the pay period end and payment dates to the day you expect to make the bonus payment
- Select each employee for pay input
- Delete all standard pay entries
- Add the Bonus allowance
- Set the Extra Pay flag (and/or set number of days paid to zero)
- When you process the pay make sure you select that the payment is an Extra Pay
You may receive messages about the employee not being due for payment etc - you can ignore those (partly why we don't recommend this method). You'll also get these again when you process their next regular pay, as the period elapsed since the last payment is less than the employee's pay cycle length.