Method B(ii): Calculating withholding amounts on lump sum payments

Taxing a bonus or lump sum payment can be quite a taxing job (pardon the pun). To make this even more confusing, the ATO has provided several methods to calculate this tax: Method A, and Method B(i) and Method B(ii).

When your clients employees receive  lump sum payments such as bonuses or commissions, it can sometimes be a bittersweet experience for them when you think about the amount of tax that ends up being deducted. The ATO have prescribed specific formulas and methods on how PAYG should be calculated for these types of payments. We’re glad to announce that our users can now access one of these methods - Method B (ii) - when processing a lump sum payment in the pay run.

When adding lump sum payments in the pay run, KeyPay users have been able to calculate the PAYG portion of this is payment using the most common method: Method A. In a recent enhancement, Method B (ii) has been built out in KeyPay as an alternate option for users.

But first, what are the differences between Method A and Method B(ii)?

Method A is the simplest and most commonly used method. It can be used for any additional payments made, regardless of the financial year the additional payment applies to. This includes all back payments, commissions, bonuses or similar payments.

This method calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a financial year, and applying that to the average total earnings to date. Instructions on using Method A in KeyPay are found here.

Method B(ii) can be used for either:

• back payments relating to a prior financial year; or
• any additional payments (including commissions, bonuses or similar payments) that don’t relate to a single pay period regardless of the financial year the additional payment applies to.

Method B (ii) is now available in KeyPay, and calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a financial year, and applying that to the average total earnings to date.

Why use Method B(ii)?

Certain industries prefer using the Method B(ii) formula due to a higher frequency of commissions or bonuses payable throughout the year that do not relate to a specific pay period. For example, employees may earn a commission based on each product they sell as opposed to reaching a target over a set period of time. In this instance, the Method B(ii) formula is deemed a much fairer solution for employees over Method A.

How do you use Method B(ii) in KeyPay?

To process a lump sum payment for an employee in a pay run using Method B(ii), click on Actions > Add Lump Sum Payment. An earnings line will appear like the below:

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Appropriate details can be entered including pay category, location and the lump sum rate / amount, and then select ‘Method B (ii)’ from the calculation method dropdown.

How do I know the calculation is right?

Don’t fear - KeyPay provides transparent calculations via a context panel within the pay run. The details of how the withholding amount has been calculated, as per ATO guidelines, for each step will display as follows:

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Note: Results obtained using Method A may differ slightly from results using Method B(ii). According to the ATO, calculations made in accordance with either method are acceptable to calculate the withholding amount.

So there we have it, users can now choose between Method A and Method B (ii) for lump sum payments, depending on their business scenario. For a step-by-step guide on how to calculate withholding amounts on lump sum payments using Method B (ii), see here. For more information on calculating PAYG on lump sum payments in general, check out the ATO guidelines.

This blog was last updated on November 12, 2019

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Disclaimer: The information in this article is current as at 1 June 2022, and has been prepared by Webscale Pty Ltd (ABN 70-154-693-955) and its related bodies corporate (KeyPay). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. KeyPay does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.