- PAYG Withholding
- Superannuation Guarantee
- Leave Loading
As outlined above, bonuses are generally additional amounts paid to employees on a discretionary basis in recognition of performance or service. When an employer determines that they are going to pay an employee a bonus, there are a few key considerations that they will have to keep in mind – being PAYG Withholding, Superannuation Guarantee and ‘on-costs’.
Like most payments to employees in respect of their employment, PAYG Withholding is required to be calculated and remitted to the Australian Taxation Office when a bonus is paid. The Australian Taxation Office provides a separate tax table and 2 separate methods in order to calculate the relevant amount of PAYG Withholding.
Broadly, Method ‘A’ is more of a straightforward/approximate method of calculating PAYG Withholding on bonuses, whereas Method ‘B’ is more complex but produces a PAYG Withholding figure more closely aligned with the actual tax payable on the payment. In any case, an employee’s tax return will be the ‘sure-up’ point to ensure that the correct amount of tax has been withheld.
In practice, if you use accounting software, the software will be able to do this calculation for you in the background (provided pay categories are setup correctly).
More information on these 2 methods (including calculation methodology) can be found on the ATO website here.
As bonuses are considered ‘ordinary times earnings’, Superannuation Guarantee will be applicable to the payment. As a reminder, superannuation guarantee for the 2023 financial year is 10.5%. (Note: There is a special caveat where a bonus in respect of overtime only is not considered ordinary times earnings, and superannuation guarantee is not applicable to the payment.)
Lastly, when holistically looking at other on-costs that may be applicable to a business such as workers compensation insurance and payroll tax, employers need to be aware that bonus payments will contribute to overall ‘wage’ figures for the purposes of assessing the annual premium to be paid for each of these on-costs.
Leave loading refers to an extra payment an employee may be entitled to receive during the period that they are on annual leave. As employees will be generally take annual leave over the holiday period, this is an important consideration for any employer to keep in mind.
Commonly, leave loading will be calculated as an additional 17.5% of an employee’s base rate of pay.
Eligibility for leave loading is determined by the award, enterprise agreement or contract an employee is employed under. Relevant awards and enterprise agreements will explicitly outline whether an employee is entitled to leave loading (including the leave loading rate) – therefore these should be reviewed prior to finalising the payment to the employee. An employee’s contract should also state whether leave loading is applicable or not.
Similar to bonuses, the payment of leave loading is considered ‘ordinary times earnings’, meaning that superannuation guarantee will be applicable to the payment. E.g. if an employee’s proportionate base salary for a day that they have taken annual leave is $500 – and leave loading is applicable at 17.5% - this will attract an additional $87.50 payment related to their leave in which superannuation guarantee (10.5%) on the total payment (day’s salary and leave loading) will be $61.69.
The payment of leave loading will also contribute to the overall ‘wage’ figures for the purposes of assessing the annual premium/liability for workers compensation insurance and payroll tax. (Note: There is a special caveat where annual leave loading that is clearly linked to a lost opportunity to work overtime is not considered ordinary times earnings, and superannuation guarantee is not applicable to the payment.)
As explored above, in most circumstances, superannuation guarantee is applicable to payments of bonuses and leave loading.
In the theme of this blog however, if an employer is intending on making a superannuation contribution on behalf of an employee, over and above their relevant superannuation guarantee requirements, this will be treated as ‘reportable super’. Reportable super is not treated as assessable income in the hands of the employee (although they don’t receive it directly), and on the flip-side an employer will be able to claim a deduction for the reportable super amount once it has been paid. Something to keep in mind – this can be a quirky tax planning strategy depending on an employee’s age, employment status and superannuation make-up.
Not surprisingly, the payment of superannuation (whether it be superannuation guarantee or reportable super) will contribute to the overall ‘wage’ figures for the purposes of assessing the annual premium/liability for workers compensation insurance and payroll tax.
On a high level, bonuses can be a great way to retain valuable staff and demonstrate their importance to your business. Taking this into consideration however, there are a number of other factors to consider when paying an employee a bonus – being PAYG withholding, superannuation guarantee, and workers compensation insurance and potentially payroll tax, as explored above.
Leave loading too should not be an afterthought, as this could have the potential to be a material cost depending on a employers number of employees, the amount of annual leave they have accrued and when they decide to take it.
If you aren’t sure about the employee payment requirements above a chat with our team at BLG Business Advisers will clear everything up. We’ll ensure you have all the necessary information specific to your circumstances to guide you in the right direction. Our team are Wollongong Accountants who service right across Australia and there are many opportunities beyond what’s above to explore, so take some time to talk with us today.