Taxing employees on Bonuses and Commissions

Karin Josefsson ATO, Blog, Payroll Leave a comment  

Often employers will pay their employees Commissions which are on top of their salary.  Some employers don’t realise that they need to manually calculate and deduct the taxes outside a computerised payroll system, depending on the circumstances of the payment.

These payments are usually made to employees in recognition to performance of their services and often calculated as a percentage of proceeds of a particular sale.  Other similar payments are usually a one off nature and could be a bonus payment or some type allowance or compensation payment such as the work is now further than their home, or even a one-off bonus payment as part of their employment engagement.

Any payments that are back payments for salary should be taxed as per the normal PAYG withholding tax tables and there is a section of back payment including lump sum payments in arrears.

The ATO does provide a calculation sheets for these and they are called the Tax table for bonuses and similar payments and pay as you go withholding commission payments.

Tax table for bonuses and similar payments (NAT7905)

  • If the payment relates to work performed in a single pay period then this amount should be added to the income for that pay period and taxed according to the PAYG withholding tax tables.
  • If the payment relates to more than one pay period or is on an irregular basis or doesn’t relate to any particular pay period then you need to calculate this as per the ATO (NAT7905) tax table.

Tax table PAYG for Commission payments (NAT10146)

  • If the payment relates to work performed in a single pay period then this amount should be added to the income for that pay period and taxed according to the PAYG withholding tax tables.
  • Option A – If the commission is related to a specific period then its calculated as per the calculations shown on (NAT10146).
  • Option B – A more accurate calculation would be to use the progressive method.  The employees total year to date income is used for calculating the tax payable.  This process should be then used for paying any subsequent payments

If an employees earnings fluctuate quite dramatically over a number of pay periods then the Tax Office will accept an average of gross taxable earnings for the financial year to date by the number of pays made.

If you have any further suggestions or comments we would really like to hear from you below.

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