So your employees have gone above and beyond and you want to give them a bonus but you are hitting some road blocks on how to report it? I mean surely if you are paying a bonus you can just hand them the cold hard cash, you claim a nice tax deduction and the employee doesn't need to report it as income or pay tax on it, right?! Sadly, no! We will give you some time to process that one ....
So now we know what not to do, what do we need to do? Let's start with the basics ...
What is a bonus?
A lump sum of money paid by employers to their employees. It is used to reward outstanding performance and boost morale, serving as tangible recognition of hard work and dedication.
What types of bonuses are there?
Performance-Based Bonuses: Is your employee meeting sales targets, achieving greatness, receiving exceptional customer reviews? You should reward them!
Annual/Year-End Bonuses: Given at the end of the financial or calendar year, these bonuses are a way to share the biz success with your employees.
Signing Bonuses: Offered to new employees as an incentive to join the biz, signing bonuses can help attract top talent.
Other: Any other type of bonus that acknowledges exceptional employee efforts with cold-hard-cash.
How much bonus should I pay?
That’s up to you our friends! There is no hard and fast rule here. You can either use a percentage of sales/services delivered or a fixed amount but remember to consider the tax implications which we will work through now.
How to pay a bonus The taxman-ian devil (aka the ATO) looks at bonuses the same way it looks at salary and wages (the ATO says gimme allllll of that TAX). Because of this, bonuses MUST be paid to your employees through your payroll system and the net cash (gross less tax) paid to the employee (that’s right… hardly anything is tax free, we’ll go cry about it later).
If you want to know how to process a bonus in Xero they have written up a great little article on how to do it - check it out here.
Do you pay superannuation guarantee on a bonus?
So by now you are probably thinking “fine, I’ll withhold the tax on the bonus, but do I need to pay superannuation on the bonus?” We are glad you asked… the answer is, PROBABLY. This is where it gets a little bit complicated but let us help you out.
Superannuation guarantee (SG) is paid as a percentage on top of ordinary time earnings (OTE). And remember above how we said that bonuses are treated the same way as salary and wages (yep, they are OTE), so there is a good chance that the SG is payable on top of the bonus.
The only time you may not need to pay super on a bonus is when it’s in respect of overtime only (because overtime hours are not ordinary hours… you with us?).
So in summary, superannuation is most probably payable on a performance bonus, a Christmas bonus, Easter bonuses, EOFY bonuses, you get the drill. And remember to withhold that tax! (ie, if you want to pay a $1,000 bonus to a staff member (lucky them!), tax will be taken out and you’ll also have to pay super on top of it).
In Summary
At the end of the financial year, your hard-working employees will see the bonus is included in their income statement and the tax has been appropriately reported and paid to the ATO, no further action required.
Warning: If you as the employer don't declare and pay tax on the bonus, the employee may get a nasty surprise when they lodge their income tax return and have tax to pay, which will negate the happy feelings they had when receiving the bonus so tread carefully..
So you now have all the deets to consider when paying your employees a bonus. We know that reading this blog will be a big BONUS to you 😉 (too much, haha). Still have questions? That's OK, feel free to make contact with one of our oh so cool not nerdy at all team members today
Disclaimer: The information provided is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice