In New Zealand annual or special bonuses are considered lump sum payments or extra pay. For more information on lump sum payments and how to tax them refer to Lump sum payments (ird.govt.nz).
In line with the IRD (Inland Revenue Department) and effective 1 April 2025, the annualised grossed-up value used to calculate the Tax for extra pay on Termination needs to be based on the terminating employee's last two paid pay periods. This is calculated as Annual Earnings on the Termination Transaction. For the correct Annual Earnings to be used for taxing the extra pays, you need to overwrite this in Manual Calculations.
For extra pay not related to or paid at termination, the annualised amount remains based on the employee's income received over the last four weeks. This is the method that the Annual Earnings field in Manual Calculation uses.
You use an Addition before Tax in Manual Calculation to pay a Bonus.
Set up an Addition Before Tax to pay the Bonus
If there isn't a Bonus already set up, follow the steps below:
Go to Payroll, Maintenance, General, Additions and Deductions.
Click Add.
Enter a Code, Shortcut Key and Description.
Select Addition Before Tax as the Category.
For Type, select Amount.
To include the Bonus in Employee Super calculations, tick Include in Deduction Calculation.
Make any other required selections.
Click OK.
Review the Employer Superannuation Contribution to check whether the addition is included in the calculation and update as required.
To Pay a Bonus using a Manual Calculation:
The steps below are specific to an annual or special bonus. If you are paying a regular bonus, e.g. a quarterly bonus, select Regular Bonus at step eleven. You will see different fields in the Tax Calculator.
Gross Earnings will replace Annual Earnings and will be calculated based on the last four weeks.
Number of Periods will replace Tax Rate and you will be able to select the number of periods that the bonus relates to, e.g. a quarterly bonus for a weekly paid employee, the number of periods would be twelve or thirteen.
Go to Payroll, Transactions, Processing, Manual Calculation.
Select the Employee.
Click the Add radio button.
Select Standard Adds/Deds and Superannuation if you need both the Employee and Employer Superannuation to be calculated.
In Pay Summary, select Adds Before Tax.
Click Add.
Select the bonus addition.
Enter the Value of the bonus.
Click Bonus Calc.
Select Lump Sum Payment for an annual or special bonus and click OK.
The Lump Sum Tax Calculator will show the following fields, which can be overwritten:
Annual Earnings - this is the calculated annualised amount based on the income the employee has received over the last four weeks. Overwrite this value for extra pay on termination with the annualised grossed-up value based on the terminating employee's income for their last two paid pay periods.
Bonus Amount - the amount entered at step eight.
The Tax Rate defaults to Auto and this ensures the correct rate is used. You can change this if required.
Click Calculate Tax. This will insert the calculated Tax into Tax Withheld.
Click OK.
Delete any standard Addition or Deduction that is not required.
Review the values and click Process.