Paying lump sum bonuses

How to deduct the right tax

Paying team members a bonus can be a good way to reward outstanding performance and motivate your team. Here’s a practical guide to help you get the tax right on any lump sum bonuses you make to staff.

Lump sum bonuses

Lump sum payments include:

  • annual or special bonuses
  • cashed-in annual leave
  • back pay
  • retirement or redundancy payments.

Overtime or any regular payments are not considered lump sum payments.

Calculating PAYE on lump sums

Follow these steps to work out the PAYE rate to use for a lump sum payment:

  1. Work out what your employee has earned (before PAYE) over the past four weeks.
  2. Multiply this figure by 13.
  3. Add the lump sum payment to the figure in step two.
  4. Use the table below to work out what income bracket your employee is in.
  5. Deduct PAYE from the lump sum payment at the rate shown in the right-hand column for that income bracket.

Choose the right PAYE rate

You can use the PAYE rate of 34.39 cents in the dollar if the employee asks you to.

Other deductions to make

You also need to calculate student loan repayments, KiwiSaver deductions and employer contributions on lump sum payments, if applicable.
ACC earners’ levy should only be applied to earnings below the threshold of $124,053.
But you don’t deduct the ACC levy from:

  • redundancy payments
  • retiring allowances
  • employee share scheme benefits.

In these cases, you’ll need to reduce the above rates by 1.39%. Redundancy payments and retiring allowances are exempt from KiwiSaver employee deductions and employer contributions.

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