As an employee, a bonus from your employer can be a great way to supplement your income and enjoy extra financial stability. However, it’s important to understand the tax implications of bonuses, especially in Australia.
In this article, we will explore the taxation of bonuses in Australia, delving into the various tax laws and regulations that determine how much of the bonus is taxable and what to expect in terms of deductions and liabilities.
Bonuses From A Tax Perspective
It is common practice for employers to award a bonus following successful spells in the financial year. These bonuses also count toward the employee’s general income and are taxable.
Considering these tax deductions, employers should pay an amount above what has been agreed on as the bonus amount. This will ensure the amount received is unaltered, even after deductions.
Whether you’re a seasoned professional or a newcomer to the workforce, this guide will provide you with a comprehensive understanding of the taxation of bonuses in Australia, so you can make informed decisions and plan your finances accordingly.
As an employee in Australia, it is important to understand how the Superannuation Guarantee may impact any bonuses you receive from your employer.
Super is a mandatory employer contribution to an employee’s retirement savings, which is calculated as a percentage of their “ordinary time earnings”.
“Ordinary time earnings” refers to the amounts employees receive for their normal working hours, excluding any overtime pay. If an employer wants to pay an employee a bonus as a reward for their good work, the bonus would likely be considered a part of “ordinary time earnings”.
This means that Super must also be paid on the gross amount of the bonus. Employers will calculate Super Contribution based on the gross bonus amount and deduct this amount from the total bonus before it is paid to you.
As a result, employees will receive a lower net amount of the bonus after Super has been deducted. If you have been promised a certain amount of bonus in hand, you should discuss an amount with your employer that can accommodate deductions towards Super without affecting the amount you receive.
How Much Are Bonuses Taxed In Australia?
Schedule 5 – The tax table for back payments, commissions, bonuses, and similar payments released by the Australian Taxation Office (ATO) describes deductions on sums such as awarded bonuses in detail.
The current version of Schedule 5 is applicable for payments made on or after 30th October 2020. It is explained below for your easier understanding of how it works.
Employers use the Schedule 5 tax table to calculate the amount of tax to be withheld from bonuses, back payments, commissions, and other similar payments made to employees.
An employee’s total amount of money in a financial year, including any bonuses, commissions, back payments, and similar arrears, is considered taxable income. The deduction also depends on the tax bracket to which your total earnings belong.
For example, if an employee earns a salary of $50,000 per year and receives a bonus of $5,000, their annual taxable income is $55,000.
As an employer, you will need to calculate the tax to be withheld from the bonus payment based on the employee’s taxable income, including the bonus, using the Schedule 5 tax table.
The tax rates and thresholds listed in the Schedule 5 tax table apply to bonuses, back payments, commissions, and similar payments and are based on the individual’s taxable income. The tax rates range from 0% to 45%.
The lowest bracket for taxable income up to $18,200 is taxed at 0%. This is followed by the second bracket for taxable income between $18,201 and $45,000, which is taxed at 19%. The third bracket is for taxable income between $45,001 and $120,000 and has a tax rate of 32.5%.
Taxable income between $120,001 and $180,000 is taxed at 37%. The highest bracket dictates that all taxable income over $180,000 is taxed at 45%.
Low and Middle-Income Tax Offset
The Schedule 5 tax table also includes information on the Low and Middle Income Tax Offset, which provides tax relief to individuals with taxable income up to a certain threshold.
The Schedule 5 tax table includes information on the Medicare Levy, which is a tax imposed to fund the Australian public healthcare system. The amount of the Medicare Levy depends on the individual’s taxable income.
Employers use the Schedule 5 tax table to determine the correct amount of tax to withhold from back payments, commissions, bonuses, and similar payments to employees. They then remit the tax withheld from these payments to the ATO on behalf of the employee.
Employees can also use the Schedule 5 tax table to check if the deductions made from their bonus by their employer tallies. The bonus awarded to you might also raise your overall income to a higher tax bracket. This will affect your tax rate.
Bonus Taxation In The US & UK
Similar to Australia, bonuses are taxed as income and are subject to income tax and National Insurance Contributions (NICs) in the UK. The amount of tax you will pay on your bonus depends on your total taxable income, including your salary and any other income sources.
In the US, however, bonuses are counted as supplemental income, not similar to regular wages, and are taxed following two methods. The first is called the percentage method, where a flat rate of 22% applies across the board.
The second method is the aggregate method. When an individual receives a bonus, employers calculate their total taxable income for the year by adding the bonus to their monthly salary and multiplying that sum by 12 months (the number of months in a year). This aggregated amount is used to determine the individual’s tax bracket and the amount of tax owed on the bonus.
In conclusion, bonuses, commissions, back payments, and similar payments in Australia are taxed as ordinary income. They are subject to the same tax rates as regular salaries.
The individual’s taxable income, including the payment and their tax bracket, determines the amount of tax to be withheld from these types of payments. The Schedule 5 tax table on the Australian Taxation Office (ATO) website provides information on the tax rates and thresholds for these types of payments, as well as the Low and Middle Income Tax Offset and the Medicare Levy.
Employers use the Schedule 5 tax table to determine the correct amount of tax to withhold from these payments and remit it to the ATO on behalf of the employee. It’s advisable to consult the ATO website or a tax professional for more information specific to your situation.