Understanding bonus pay tax
Bonus payments are subject to a special tax rule called 'lump sum' or 'extra pay'. This is different from an employee's normal tax rate and is taxed at a flat rate depending on the employee's earnings over the last four weeks.
For detailed information about lump sum payments and how they are taxed, you can refer to IRD's information here: IRD: Lump sum payments
Payment options
Timing with the pay run
With regular pay: This is the recommended option. It is the easiest method and there is less risk that the payment could be under-taxed based on IRD's four week date range tax selection criteria.
As a separate pay run: Not recommended but can be done if required. Will require more effort to set up, and depending on the timing, when IRD's four week date range criteria is applied to the payment there is a risk that the employee's tax rate will not be high enough.
Gross or net
Gross amount: A gross amount means you have decided on the amount the employee will be paid before tax and other deductions (such as KiwiSaver or Student Loan deductions).
Net amount: The net amount is what the employee will receive after tax, KiwiSaver or other deductions are applied. For example, an agreed amount of $500 in the hand after other deductions are taken off.
Setting up your bonus code
Pre-configured bonus code
SmoothPay comes with a BONUS code already set up and ready to use.
Extra Pay tax rule enabled
Optional: Exclude from Holidays Act calculations. This is only permitted for ex-gratia or discretionary bonus payments only. Employers often try to exclude bonuses from holiday earnings but this not permitted for regular or productivity or incentive based bonuses, despite them being called bonuses.
Calculation method: This is set to Units x Rate. This prevents automatic multiplication across multiple periods.
Additional codes
You can consider setting up a separate Bonus code to distinguish certain types of bonuses from regular or productivity payments if you wish. For example, you could create a Christmas Bonus code used only for Christmas bonuses if you wanted to track these separately.
Processing different types of bonus payments
Gross bonus value
Add the BONUS (or XMAS) entry to the employee's Allowances section
Enter the amount (e.g., 1 unit of $500)
Net bonus value
Follow these steps in order:
Complete all other pay entries first
Add the BONUS (or XMAS) entry to Allowances (ensure calculation method is Units x Rate, then enter 1 unit)
Click the Net Pay Wizard
Enter the desired net bonus amount (e.g., $500)
SmoothPay will automatically calculate the grossed-up value (e.g., $850) so the employee receives exactly $500 after tax
Payment Methods
With regular pay run
This is our recommended method. This means you simply add the bonus payment to your normal pay run.
Simple steps:
Add the BONUS (or XMAS) entry to the employee's Allowances section
Process the pay normally
⚠️ Important: Do not save the employee's standard pay template with the bonus included, or it will appear in every subsequent pay until manually removed.
Separate bonus pay run
We don't recommend this method because there is a risk of undertaxing the employee, it requires multiple additional steps and generates system messages that might be confusing for you.
If you do choose to create a separate pay run for the bonus, you can follow our steps below - either the 'quick' method or the more manual one.
Quick Method:
Set pay period end and payment dates to the bonus payment date
Select employees for pay input
Choose Payrun > Import > Convert to Bonus Payrun, which will automatically remove irrelevant pay entries
Manual Method:
Set pay period end and payment dates to the bonus payment date
For each employee:
Delete all standard pay entries
Temporarily deactivate all standing/recurring deductions
Add the Bonus allowance
Set the Extra Pay flag (and/or set number of days paid to zero)
When processing, ensure you select that the payment is an Extra Pay
Expected System Messages:
You may receive messages about employees not being due for payment - these can be ignored
Similar messages will appear during the next regular pay run because the time since the last payment is shorter than the employee's normal pay cycle