Taxing lump sum payments
Lump sum payments (also called extra pays) include:
- annual or special bonuses
- cashed-in annual leave
- retiring or redundancy payments
- payments for accepting restrictive covenants
- exit inducement payments
- back pay
- lump sum holiday pay
- employee share scheme benefits.
Overtime or any regular payments are not lump sum payments.
When calculating PAYE on lump sum payments, different calculations are used depending on whether the income comes from:
Regardless of income source, redundancy payments, retiring allowances and employee share scheme benefits (ESS) aren’t subject to ACC earners’ levy.
To calculate tax on lump sums paid to employees on:
- CAE or EDW tax codes – use the primary employment method, not their ordinary flat rates
- NSW tax code – use their ordinary flat rate
- a special tax code – use the rate specified on their STC certificate.
Note – employee share scheme benefits
Employers can choose whether or not to deduct tax from ESS benefits because it won’t suit all share purchase agreements.
If PAYE is withheld, then you must also deduct student loan and child support amounts, if applicable.
We can’t give you guidance on deciding whether or not to deduct tax from ESS benefits.
If the lump sum has PAYE applied using the lowest rate, tick the box on the Employer monthly schedule (IR348) to show this.
Lump sum payments from primary employment
To calculate the PAYE we need to calculate the grossed-up annual value of the employee’s income and add that to the extra pay amount.
- Add up the PAYE income payments for the four weeks ending on the date of the extra payment (whether this is the normal pay cycle or not).
- Multiply by 13.
Total of lump sum payment and grossed-up annual value of employee’s income for previous four weeks
PAYE rate (including 1.39% ACC levy)
PAYE rate for redundancy, retiring payments or ESS benefits
Student loan repayments and KiwiSaver
If the employee uses a student loan tax code (M SL, ME SL) then you’ll also have to deduct student loan repayments. Add any gross salary or wage payments for the same period to the gross lump sum amount and deduct the pay period threshold, ie, $367 a week. The remaining amount will have student loan deductions made at the standard deduction rate of 12 cents in the dollar.
You’re going to pay a bonus payment of $1,000 to one of your employees. The employee’s gross earnings are $644 weekly. The calculation will look like this:
Weekly gross wages
If the employee is a KiwiSaver member then you’ll need to deduct contributions from some lump sum payments
Lump sum payments made outside the standard pay period
A lump sum can be paid to an employee in the employer’s usual pay cycle (as demonstrated above). or on another date outside this cycle. This can happen for a number of reasons including termination or redundancy.
When a payment is made outside the normal pay cycle, the 4-week period ends on the day the payment is made.
Read the examples below.
You’re going to pay a redundancy payment of $7,500 to an employee with an MSL tax code with their normal pay on 5 October 2016. The employee’s gross earnings are $1,128 fortnightly. They received a one-off bonus of $1,000 on 5 September 2016.
The calculation will look like this:
Fortnightly gross wages
You’re going to pay a redundancy payment of $7,500 to an employee with an MSL tax code with their normal pay on 5 October 2016. The employee’s gross earnings are $1,128 fortnightly. They received a one-off bonus of $1,000 on 5 September 2016. The employee has asked that the payment be made as soon as possible. You’ve agreed to do this and paid the lump sum on 28 September 2016, bringing the $1,000 bonus of 5 September 2016 into the 4-week period.
The calculation would look like this:
Fortnightly gross wages