Payroll tax for bonuses and commissions
Bonuses and commissions paid to employees are liable for payroll tax. Learn how to correctly declare bonus and commission payments in your payroll tax returns.
What are bonuses and commissions?
A bonus is a lump sum payment voluntarily made by an employer in addition to an employee’s regular wage. Bonuses are often used to:
- reward employees for exceeding performance targets, or
- share an employer’s recent financial success with its workforce.
Commissions include all payments to employees that are dependent on:
- sales-based performance, or
- the volume and value of deals brokered by the employee.
Commissions are usually percentage-based and are a common form of employee remuneration in sales and marketing roles.
How are bonuses and commissions treated for payroll tax?
Bonuses and commissions are considered wages and are liable for payroll tax.
See section 13(1) of the Payroll Tax Act 2007 (PTA).
Commissions are liable wages for payroll tax purposes, regardless of whether they are the only payments made to an employee or are made on top of a base salary or retainer.
What you need to do
To complete your monthly returns and/or annual returns you need to correctly calculate the taxable value of all wages, including bonuses and commissions.
Errors may result in a tax default. If you have a tax default you will have to pay the outstanding tax and may also have to pay interest and penalty tax.
Always maintain relevant records showing how your bonus and commission figures were calculated. Records must be:
- retained for at least 5 years
- sufficient for a payroll tax liability to be properly assessed
- in English, or a form easily translated to English, and
- readily available to us if requested, for example as part of a payroll tax audit.
Work out when the bonuses and commissions were paid or payable
A bonus or commission is said to be paid when it is given to the employee, that is:
- credited to the employee’s bank account as part of a pay run within a particular month, or
- paid to the employee by some other method.
The bonus or commission is payable when the employee:
- has earned it, and
- is entitled to be paid that bonus or commission within a particular month.
Declare bonuses and commissions in your payroll tax returns
If your business records a bonus or commission as an expense but has not yet paid it to the employee, you may declare it as a liable wage when you pay it to the employee.
Declare any accrued but unpaid bonuses or commissions for payroll tax purposes within 12 months from the date they became payable.
Bonuses earned over several months
If you pay a bonus that does not relate to work done in a particular month, but is a bonus earned over several months, the payment is considered to relate to services performed by an employee in the month the bonus is paid.
Blue Pty Ltd records a bonus to an employee, Dmitri, as an expense in April.
It is not paid to Dmitri until May.
Blue Pty Ltd can declare it as liable for payroll tax when it lodges a monthly payroll tax return for the month of May.
Green Pty Ltd makes a bonus payment to an employee, Geraldine, in December 2023.
The bonus is for services performed by Geraldine throughout the 2023 calendar year.
Green Pty Ltd should include it in their monthly payroll tax return for the month of December 2023.
Common errors with bonuses and commissions
Trailing commissions
A trailing commission is an ongoing commission paid to a financial advisor/broker while a financial product, such as a loan or an investment, is in force.
Payroll tax audits have shown that trailing commissions paid by licensees under financial services contracts are often not declared.
A trailing commission must be included in your monthly return and/or annual return for the financial year in which it is paid or becomes payable, whichever occurs first.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.