Paying a bonus? Read this article

In a tight labour market, employers are looking for ways to financially remunerate their employees after a challenging few years.

Paying a bonus is one way to reward your employees and acknowledge the contributions they have made to your business.

Paying a bonus is a great way to recognise additional performance without necessarily locking in a permanent pay increase that you will carry into the future.

As with most things tax related, the payment of bonus comes with tax considerations that may not be immediately obvious.

Some of the less than obvious considerations are as follows:

• Tax is generally required to be withheld from a bonus. So if you want to pay your employee $1,000 in the hand (after-tax) as the bonus payment, you first need to withheld tax from the grossed up payment.
  

• The calculation for the tax to be withheld from the bonus payment is different depending on whether the bonus relates to a single period of pay or multiple or irregular periods. Seek professional assistance here.
  

• The superannuation guarantee amount will typically accrue on bonus payments as well, as the bonus payment is linked to the employee's performance and in this case, normally considered to be ordinary time earnings.
  

• The bonus payment and associated super will contribute to your payroll tax thresholds and also need to be reported for WorkCover purposes (i.e be aware of additional costs above and beyond the initial bonus payment).
  

• Annual leave, carers leave and long service leave does not accrue on bonuses as these entitlements instead accrue on the base rate of pay (finally a win for employers!)
  

• The bonus would be deductible to the employer when paid, and likewise, assessable income when received by the employee.

When a bonus is paid, beware that the news may travel to other employees that did not receive the bonus.

It can therefore be prudent to discuss the confidentiality of the payment with the recipient. People talk after all and those that didn't receive a bonus payment made be wondering why not.