QuickBooks does not calculate the correct amount of PAYG tax on Bonus payments

Legacy KB ID: 4433

Question

Why does QuickBooks calculate tax on a Bonus as if the amount was wholly earned in that pay period?

Answer

For proper treatment of PAYG tax on bonus payments users should refer to ATO publications available at https://www.ato.gov.au/content/downloads/NAT7905_BonusesTaxTable.pdf.

It is typical to pro-rata a bonus payment over the period it pertains for the calculation of PAYG tax and not treated as if it is wholly earned in the current pay period. 

QuickBooks will add Bonus payments to the gross pay of this period and apply the PAYG rate application for that total amount for that period. 

If you wish to pro-rata the bonus over a period you will need to manually calculate the appropriate amount of PAYG tax to withhold.  The ATO publication provides a guide on making this calculation.

 

The relevant section of the ATO guide, (current guide issued 1/11/2004) states:

Where the bonus or similar payment relates to a period in excess of one pay period or is paid on an irregular basis, you should work out the correct amount to withhold using the steps below.

1.    Use the relevant tax table to work out the amount to withhold from the payee’s normal earnings for one pay period.

2.    Divide the bonus or similar payment by the number of pay periods to which it relates.

3.    Disregard any cents. For example $1.75 becomes $1. If the result is nil, there is no amount to withhold on the bonus or similar payment.

4.    Add the amount in step 3 to the normal earnings amount for a single period.

5.    Use the same tax table used in step 1 to determine the amount to withhold on the combined payment amount calculated at step 4.

6.    Subtract the amount worked out in step 1 from the amount worked out in step 5.

7.    Multiply the result by the number of pay periods to which the bonus relates.

If the payment is a one-off payment and does not relate to a particular pay period or relates to a number of pay periods in excess of 12 months, for the purpose of this table, the payment is treated as being paid over a 12 month period.

 

You can get tax tables from: https://www.ato.gov.au/businesses/content.aspx?doc=/content/33283.htm&alias=taxtables

 

Additional Information

You can use the QuickBooks Payroll Module to find out the correct tax amount for one pay period with its pro-rata bonus payment by entering the amount as normal pay with no other item.  With the latest tax table applied, the tax amount will be the correct amount for one period.  Subtract the amount of tax for the normal pay for the period to get the pay period PAYG tax increment. Then multiple this amount by the number of pay periods involved to get the additional PAYG tax for this bonus payment.  Add this amount to the normal tax amount for the pay period to get the appropriate amount of tax to withhold.   

 

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