Christmas Bonuses & Gifts – Tax Implications

It is that time of the year where some employers start to think about rewarding their employees with a little something extra. There are both monetary and non-monetary options – or of course both ?. The monetary options may have some tax implications as outlined below.

Option 1 – Christmas Bonus

If you pay a bonus, then this will need to go through the payroll system. PAYE and other applicable payroll taxes will need to be deducted. This is just like any other wages or salary payment. A bonus payment is classed as a ‘lump sum’ payment and is taxed at a flat rate based on what income range the employee falls into. Refer to the link for more detailed information. https://www.ird.govt.nz/tasks/calculate-paye-for-a-lump-sum-payment

You will also need to consider the true cost of the bonus to the business. For example, if you want to pay a bonus where the employee will receive $500 ‘in the hand’ then the $500 will need to be grossed up for the payroll taxes. This means that the cost to the business is more than $500. If you want the cost to the business to be $500 only then you need to communicate with your employee that the $500 is gross, that is, before payroll taxes.

Option 2 – Christmas Gift

There is a $300 per employee exemption from paying FBT if you provide gifts to your employees. If the value of the benefits for an employee goes over the $300 per quarter limit, then the full value of the benefit is subject to FBT. It’s important to realize that the exemption of $300 isn’t deducted first. Its therefore important not to go over the quarterly limit.

The other limitation of this exemption is that the total combined benefits provided to all employees in a year cannot exceed $22,500.

The benefit of giving employees gifts of this nature is that the cost is fully tax-deductible to the business. GST will be claimable if it meets the usual GST requirements. Please note that if you provide gift vouchers though you cannot claim the GST.

If you want to discuss the above or any other PAYE related issue, then please contact us.

Find out more about deductibility of other Christmas expenses in our article here: Entertainment & Gifts Guide