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Tax on lump sum payments 17 Aug 2015

There are fewer tricky tax calculations than calculating tax on lump sum payments.

Overtime is not a lump sum. It just adds to the wages for that period.

The steps are:

1                Take gross wages for past four weeks and multiply by 13.

2                Add the lump sum.

3                Determine the annual tax rate. For example, if the total is $49,000 the tax rate is 30% (being over the $48,000 threshold). If the employee is using a secondary tax code, use that + ACC (see 4 below).

4                Add ACC, currently 1.45% for primary income up to salary limit of $120,070.

5                Apply the resulting tax rate. In the example above it is 30% + 1.45% = 31.45%

6           Calculate student loan and KiwiSaver adjustments.

You may notice, using the example above, if the bonus were say $5000, $4000 of this falls below the $48,000 threshold. This indicates, depending on what else happens during the remainder of the year, tax may have been overpaid and the employee would qualify for a refund.

It pays for employees, who get bonuses, to check their tax situation at the end of each year. 

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