Extra taxing lump sump payments (New Zealand)
In New Zealand, some allowances must use a special IRD tax calculation called the Extra Pay calculation. This method taxes at a flat rate rather than the standard graduated scale PAYE and so the tax can sometimes look higher or lower than normal - the IRD's intent is to minimise employees being over or under taxed when receiving payments in addition to thier normal earnings.
This tax calculation is used for taxing lump sum payments including, but not limited to:
- Annual or special bonuses
- Cashed-in Annual Leave
- Retiring or redundancy payments
- Back pay
- Future dated holiday pay or public holiday
This article explains how the software calculates tax using the Extra Pay calculation.
When a lump sum payment is being processed in EXO Payroll and has been setup to use the Extra Pay calculation, the system will complete the following process:
- Total the Gross Earnings from any pay with a Pay Period End Date that falls within the last 28 days up to and including the pay that the lump sum payment is being made but, but excluding the amount of the lump sum payment.
- Annualise this amount by multiplying by either 12 or 13 (12 if the employee is normally paid on a Monthly frequency or 13 if they are any other frequency)
- Adds the amount of the allowance onto this annualised total then determines which tax bracket this overall figure falls into.
- Taxes the allowance at a flat rate of whichever bracket the above falls into.
Example
Bonus payment of $1000 added into a pay for a monthly employee who gets paid $4500 per period.
Gross amount for last 28 days = $4500
$4500 x 12 = $54000
$54000 + $1000 = $55000 ($55000 falls into the 30% tax bracket)
Bonus taxed at 31.39% (30% bracket plus earner levy)
Tax on bonus = 0.3139 x 1000 = $313.90
For more information visit the IRD Website: Inland Revenue - Lump Sum Payments
Need more help? You can open the online help by pressing F1 on your keyboard while in your software.
You can also find more help resources on the MYOB Exo Employer Services Education Centre for Australia or New Zealand.