There are a number of different types of bonuses and commission payments you may need to pay your employees, all of which can be handled by PayHero. It's important to process bonus and commission payments correctly for your employees, as each one will have a different effect on holiday pay accrual and annual leave rate calculations, as well as tax calculations.
The three types of bonus and commission payments are as follows:
Regular - The employee is paid this type of payment regularly - usually in every pay (if they meet the criteria to trigger the bonus). This is most commonly associated with commission or other performance incentives that are processed very regularly. These types of payments accrue holiday pay, with both the Ordinary and Average pay rates increasing.
One-off - The employee accrues holiday pay, but the bonus will only increase the Average pay rate. Used for bonuses or commission payments that occur less frequently than monthly, such as quarterly or annually.
Discretionary - The employee does not accrue holiday pay on the payment, and the rates remain unaffected. Truly discretionary bonuses are fairly rare, but a Christmas bonus is an example. For full details on which payments qualify as a discretionary payment, see the "Discretionary payments" section of this article from MBIE.
Which type should I use?
To ensure that the holiday pay and tax calculations on bonuses or commission payments are correct, it's important to use Pay Items that are set up to correctly reflect the terms of the payment.
The following chart can help you decide which pay item needs to be used, and whether any special settings will be required for the pay item you use:
Pay Items
The first step is to ensure your pay items are set up correctly under Manage > Pay Items, in the Earnings tab. To help with this, there are four pay items set up by default in PayHero:
You can rename these pay items, or create new pay items to suit your needs. Which of the default pay items you should use, or the settings you should apply if setting up your own pay items, depends on the type of payment you're processing.
Check the flowchart above, then click the appropriate button below to learn more.
Payments that fall in the Other Earnings category are made to the employee regularly, usually in every pay (if they qualify for that pay period).
These payments will be taxed as normal income for the employee, and will be accounted for in the employee's holiday pay and leave rate gross earnings calculations, as detailed in MBIE's definition of Gross Earnings here.
You can use PayHero's default 'Bonus - Regular' pay item for these types of payments, or the 'Commission' pay item, if it's a commission pay item. Both of these pay items work the same way, and can be renamed if you prefer different terminology.
If you need additional pay items of this type, you can create new ones by adding a new Other Earnings type pay item, and applying the following settings:
Payments that fall in the Bonus (Spans multiple pay periods) category are payments made to the employee regularly, but less frequently than the employee's normal pay period. For example, a monthly bonus (for employees paid weekly or fortnightly), or quarterly bonus. Annual and special bonuses are not included in this category - see the Bonus category instead.
You can use PayHero's default 'Bonus - One-off' pay item for these types of payments, but you must ensure you tick 'Spans Multiple Pay Periods' and set how often the bonus is paid. This is an example of what a quarterly bonus pay item might look like:
If you need additional pay items of this type, you can create new ones by adding a new Bonus type pay item, and applying the Spans Multiple Pay Periods setting. For example, a monthly bonus or commission payment would have the months setting set to '1' month.
The function of this setting is to ensure that these payments are taxed differently to normal earnings, following IRD's specifications around bonuses paid less frequently than the pay period.
Ideally, these payments should be included in the employee's normal pay when they're due for payment, as this helps ensure the calculations are properly aligned to your pay periods.
Payments of this type will be accounted for in the employee's holiday pay and leave rate gross earnings calculations, as detailed in MBIE's definition of Gross Earnings here. However, if the Months field is set to more than 1 month, these payments will be excluded from the employee's Ordinary Rate (4 week average) calculations.
Payments that fall in the Bonus category are made to the employee irregularly, usually annually or under certain qualifying contract terms. Annual and special bonuses are the most common examples of these types of payments.
You can use PayHero's default 'Bonus - One-off' pay item for these types of payments, ensuring the 'Spans Multiple Pay Periods' setting has not been ticked. This is an example of what an annual bonus pay item might look like:
If you need additional pay items of this type, you can create new ones by adding a new Bonus type pay item, and giving it a name.
This type of payment will be taxed as a lump sum, or extra pay. Learn more about lump sums from IRD here: Lump Sum Payments
Payments of this type will be accounted for in the employee's holiday pay and Average Rate gross earnings calculations, as detailed in MBIE's definition of Gross Earnings here. However, these payments will be excluded from the employee's Ordinary Rate (4 week average) calculations.
Payments that fall in the Discretionary Payment category are made to the purely at the employer's discretion. There is no contractual obligation to make these payments. MBIE has a more detailed breakdown of what can be considered discretionary in the "Discretionary Payments" section of this article.
You can use PayHero's default 'Bonus - Discretionary' pay item for these types of payments. This is an example of what a discretionary bonus pay item might look like:
If you need additional pay items of this type, you can create new ones by adding a new Discretionary Payment type pay item, and giving it a name.
This type of payment will be taxed as a lump sum, or extra pay. Learn more about lump sums from IRD here: Lump Sum Payments
Discretionary payments will not be included in the employee's gross earnings for Holiday Pay and leave rate calculations.
Commission payments follow the same rules as bonus payments. You can use the flow chart and select the appropriate section above for more detailed info on setting up custom pay items to suit your needs.
A default Commission pay item already exists in your PayHero account:
Keep in mind that this pay item is only appropriate for paying commission that is calculated in every pay for the employee (if they meet their targets that pay). See the 'Other Earnings' section above for information on how this pay item behaves.
For less frequently paid commission (e.g. quarterly), see the 'Bonus (Spans multiple pay periods' section above for information on how to set up an appropriate pay item, and the tax settings that will apply.
Running the Pay
Once the bonus or commission pay item has been set up appropriately, Run the Pay for your employees and add the bonus to the employee's normal pay. To do so, simply select the correct employee, click the button under Earnings and apply the appropriate bonus.
Running a Separate Bonus Pay Cycle
It's generally recommended that you include a bonus payment in the employee's normal pay. The Spans Multiple Pay Periods settings on the pay item will ensure that it's treated appropriately, even if it's earned over a longer period than the pay cycle.
However, if you'd like to pay the bonus separately from the usual pay cycle, you can create a one-off pay solely for the bonus payment. Set the pay date to the date that you'll be paying the employees, and set the Start Date and End Date to be the same as the last regular pay for this employee. Doing so will ensure that the bonus is taxed correctly, and that it won't affect the tax calculation in the next wages pay.
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