Hi everyone,
Just keen to find out how is income tax calculated on commissions or bonuses. If someone makes an $1000 a month on top of their gross monthly income is it just taxed that + the $1000 or per year?
Thanks
How Is Income Tax Calculated on Commissions and Bonuses?
cya on 29/06/2021 - 18:18
Last edited 29/06/2021 - 18:50 by 1 other user
Last edited 29/06/2021 - 18:50 by 1 other user
Comments
You are likely to have been taxed higher for the pay run, but you'll get it back when you do your tax return.
Why? because the $1000 would have been taxed as $1000 x 12, not $1000 / 12.
If you mean taxed higher as in higher tax rate from $1000 x 12, no it won't be. If the commission is an annual amount, its PAYG would be calculated as though it is $1000/12 but paid as a lump sum.
https://www.ato.gov.au/Rates/Schedule-5---Tax-table-for-back…
It is taxed at the time it is paid. Commissions are generally monthly, bonuses are annual.
So if your base is $5,000 per month, and that months commission payout is $1,000 then you're taxed on $6,000 being that months pay.
The following month your commission might be only $200, so that month you're taxed on $5,200Over the course of a year you would have overpaid on the first month as the tax would have been calculated assuming you're going to get that $6,000 each month of the year, as they don't know how much commission you're going to get each month.
At the end of the year, you'll get a refund for the amount you overpaid.
Method of calculating PAYG for commission is abit more complex than $6,000 one month and $5,200 in another month. Read the link from ATO that I provided above. Basically the method is to average out the fluctuations of $6,000 and $5,200 and lessen the overpayment.
@trex: It's not, it is literally how everyone does it.
In the ATO link it is Method A, bit you missed is
"If you are paying a commission, bonus or similar payment for a defined period of less than 12 months, you can choose to calculate withholding by using the number of pay periods the payment relates to at step 3."
The month you get $6,000 it assumes you'll be getting that each month going forward. So for that pay period you pay taxes on the bracket if you did get $6,000 each month after for the rest of the year.
The next month, it assumes you'll be getting $5,200 each month for the rest of the year and taxed at that bracket.
@[Deactivated]: I can assure you, literally not everyone does it. An argument with a point like that never holds water. "I was speeding only because everyone does it".
Not sure what you meant about defined period less than 12 months? Are you saying the commission is for defined period more than 12 months?
The method you mention is only applicable if the commission is for work performed in a single pay period. If it is not then one of the prescribed methods should be adopted. Commissions paid for closing out a large contract for example is for work typically performed more than a single pay period. Work is performed throughout the duration of the negotiations all the way to signing and not just at contract signing. The intention of this method is to average out the fluctuation that you mention.
Heck the links are from ATO whether you like it or not.
Not sure what you meant about defined period less than 12 months? Are you saying the commission is for defined period more than 12 months?
No, not less than, or more than, but exactly 12 months.
Commissions paid for closing out a large contract for example is for work typically performed more than a single pay period. Work is performed throughout the duration of the negotiations all the way to signing and not just at contract signing.
It's not that simple though. Commission isn't just paid when the deal is signed, there is often ongoing commission month after month too. Often with the ongoing commission the "work" was done many pay periods ago and no additional work is really being done to earn that commission. This is often true in businesses that sell subscriptions for example.
If you are paying a commission, bonus or similar payment for a defined period of less than 12 months, you can choose to calculate withholding by using the number of pay periods the payment relates to at step 3. For example, if a commission relates to four weeks and the employee is paid weekly, you divide the commission by four pay periods at step 3, rather than 52 pay periods.
The above part from Method A is on how to apply Step 3, not whether commission falls into the prescribed methods i.e. it is already within a step in Method A. So if it is exactly 12 months (not less than 12 months), you cannot chose to calculate withholding by using the number of pay periods the payment relates to at step 3.
Yes, it is not that simple so definitely not just everyone does it one way. It depends on the nature of the commission, industry and employer size. That is why payroll specialist can be highly paid. In your commission example, it sounds similar to a lump sum performance bonus paid a few times in a year which makes it a more compelling reason that ATO's method should be adopted. It is a risk that one should weigh.
At the end of a financial year, there is no impact on one's taxes since this is just a calculation for PAYG deduction. But getting it right would remove any fluctuations and over deduction of PAYG which can be a burden on employees. If a large employer's payroll is audited by ATO, one of the things they can check is whether PAYG is calculated correctly.
If someone makes an $1000 a month on top of their gross monthly income is it just taxed that + the 1000 or per year?
If you're talking about how much tax should be "withheld", then that will depend on your employer's calculations and whether the $1000 is a once-off or if it's an amount they expect you to earn every month.
That is different to how much tax you'll actually pay on that amount in the end after adjustments have been made. You'll be paying your marginal rate on that amount. Your marginal tax rate depends on your taxable income for the entire year.
Clear as mud?
It's taxed as income, the same as any other hourly rate/wage/salary.
Which industry?
Taxed on everything you earned that particular financial year.