The simplest option and the most accurate is for employees to use a tax return to reclaim any overtaxed amount at the end of a financial year. For most employees this process is now automatically done by the IRD.
You can also use the "Lump sum" pay type. It is a system pay type and is taxed as per the calculations set out by the IRD.
Alternatively, you can spread a payment over a wider pay period to minimise the unnecessary tax payments for lump sum or bonus pay. This could be done using a custom pay type.
Lump sum as applied in the timesheet is a system pay type that can be used to pay any amount that is above standard pay.
It is a distinct pay type and is taxed as per the IRD rules and regulations.
Using a custom pay type
You may wish to manually spread the bonus out, or you may need to give it a specific title. For this you'll use custom pay types.
To reduce the effect of a sudden high-income pay period, we recommend spreading the payment out over a longer period. A good period of time is 2 to 3 weeks. Any longer than that may result in a tax bill at the end of the year.
Select "pay types" from the "employees" drop-down menu at the top of the page.
Create a new pay type
- Name the pay type so that it is clearly recognisable in the employee's timesheet
- Set the rate as "1". The dollar amount will be set later, in the timesheet
- Set the rate per as 'per unit' because then the amount can vary
- Save the pay at the bottom of the page
Create a custom pay type:
For this example, the bonus will be spread over three weeks:
- Return to the Dashboard and the appropriate Pay number
- Set the Pay period to start 3 weeks prior to the desired Pay day (the end of payments)
Select the timesheet of the employee getting the bonus
- Add an additional week to the Pay Period
- Move this addition week's start date to one week earlier than the original Pay
- Set a nominal amount for the first week ($1 or $10 or perhaps half the amount)
- Hit 'Update and save' and then refresh the page
Add an additional Row to the Pay Period by selecting the green icon
- Select 'Quarterly Bonus' from the drop down menu
- Add the second entry of the bonus, and enter the remainder
- Note: when entering the lump sum or bonus payments, the figure can be excluded from all calculations regarding annual leave. Keep in mind this only applies to truly discretionary payments. If you are unsure please contact Employment New Zealand and/or the IRD.
- Select "update and save", and you're done