Bonus Payments are created by adding a pay line to the pay for an employee. There are different types of bonuses an employee might receive, which have different effects on the employee's holiday pay accruals, annual leave rate calculations, and tax calculations. The types of bonuses are:
Regular Bonus - the employee accrues holiday pay and the bonus will increase both the ordinary and average pay rates.
One-off Bonus - the employee accrues holiday pay but the bonus will increase only the average pay rates. Use it for bonuses that occur less frequently than monthly, e.g. quarterly or annually.
Discretionary Bonus - the employee does not accrue holiday pay and the rates are unaffected. A Christmas bonus is an example of this.
To ensure that the holiday and tax calculations on bonuses are correct, it's important to use pay codes that are correctly setup to reflect the terms of the bonus.
This chart can help you decide which pay code you should use, and whether any special settings are required on the pay code you use:
The first step is to ensure your pay codes are set up correctly under Setup > Pay Codes. To help with this, there are default Bonus pay codes set up in FlexiTime. The standard set-up is for there to be three pay codes available: Bonus - Regular, Bonus - One-off and Bonus - Discretionary. You can rename these bonuses to suit your requirements, or create new pay codes as needed.
Some companies that have been using FlexiTime for a long time may have a single Bonus pay code. If this is the case you may need to change the pay code to meet your particular requirements.
Bonus pay codes should be set up as a Taxable Allowance, with Units set to Other.
A one-off Bonus should have Exclude from Ordinary Earnings ticked.
A discretionary Bonus should heave Exclude from Holiday Earnings ticked.
Spans Multiple Periods
Another consideration when paying bonuses is how the the tax will be calculated. When a bonus is included in every regular pay (for example a monthly salaried employee paid a monthly bonus in each pay) then the standard bonus pay code set up is adequate. If the bonus is paid on a different cycle to your regular pays then you need to edit the pay code and record how many months the bonus covers:
In this example it's a quarterly bonus, paid every three months. Another example would be a monthly bonus for employees who are usually paid weekly or fortnightly, in which case the Months should be set to 1.
You should also tick Spans Multiple Pay Periods if the bonus is paid on a different cycle to the standard pay, for example an employee paid monthly on the 1st of the month, receiving a monthly bonus paid on the 15th of the month. In this case the Months should be set to 1.
Create the Pay
Once the pay code is set up appropriately, create the pay run for your employees and add it to the employee's pay. To do so, simply select the Pay Code dropdown in the top right corner of the pay, select the appropriate Bonus pay code and click Add.
All Taxable Allowance pay codes provide some extra options:
For a lump sum payment, tick Extra Pay. The chart above can help guide you on whether the bonus should be processed as an Extra Pay.
Only if the payment is for a redundancy, retiring allowance or employee share scheme benefit should you tick Not Liable for ACC Earners' Levy.
What tax rate is used for a lump sum payment?
If Extra Pay is selected, FlexiTime will work out the employee's average pay for the last four weeks and gross this up, plus this pay amount, to calculate the employee's annual salary. This calculated annual salary is used to determine the tax rate to be used for this pay.
For more information, please see the IRD's website.
Elected Lump Sum Tax (ELST) Rate can be used to select a higher tax rate to the calculated tax rate. If the calculated tax rate is higher than the ELST rate, the ELST rate will be ignored and the calculated tax rate will be used.
For more details on how tax is calculated on bonuses, see the instructions at the IRD.