Payroll Bulletin 6

22 Apr

LUMP SUM PAYMENTS

Lump sum payments – also called extra pay – include:

```
annual or special bonuses
```
```
cashed in annual leave
```
```
retiring or redundancy payments
```
```
gratuities (tips)
```

back pay, including back paid holiday pay

```
lump sum holiday pay
```
```
retiring allowances
```
```
employee share scheme benefits.
```

Overtime or regular payments are not lump sum payments.

You must deduct PAYE on lump sum payments. How you calculate PAYE depends on your employee's tax code, including whether they have a student loan or are enrolled in KiwiSaver.

IRD has a helpful article about calculating tax on lump-sum payments, but here is the step-by-step process:

Work out what your employee has earned (before PAYE) over the past four weeks.

```
Multiply this figure by 13.
```

Add the lump sum payment to the figure in step two.

Use the tax rate to work out what income bracket your employee is in.

Deduct PAYE from the lump sum payment at the employees tax rate.

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 $128,470.
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 employees tax rates by 1.39%. Redundancy payments are also exempt from KiwiSaver employee deductions and employer contributions.

BONUS PAYMEMTS

Bonuses can be a great way to incentivize your existing employees or recruit new ones. They can vary greatly depending on the company, industry, and specific goals they aim to achieve. Some common types of bonuses are:

```
Sign-on Bonuses
```
```
Retention Bonuses
```
```
Referral Bonuses
```
```
Performance-Based Bonuses
```
```
Sales Bonuses/Commission
```
```
Holiday Bonuses
```
```
Recognition Bonuses
```
```
Profit Sharing Bonuses
```

If you are planning to pay a bonus to your employees, it is very important to be aware of how this should be processed.

A bonus is usually treated as a discretionary (irregular) or non-discretionary (regular) payment.

Discretionary Payment

A discretionary bonus payment is a type of bonus that is not guaranteed and is typically awarded at the discretion of the employer, often as a reward for exceptional performance, outstanding contributions, or to recognize other factors such as loyalty or dedication. These irregular payments are treated & taxed as a lump sum payment therefore, are not part of Holiday Pay Liable Earnings and the annual leave rates are not affected.

Non-Discretionary Payment

A non-discretionary bonus payment is a type of bonus that is part of an employee's regular remuneration package and must be paid if the employee meets all the requirements. These bonuses are treated as part of an employee's earnings and have PAYE deducted, therefore, they are part of the calculation of payment for annual holidays.

Links to further information:

If you have any questions or need further information, please don't hesitate to contact Olga at olga@topflight.co.nz