Guide to Paying Staff Bonuses, Allowances and Benefits

Paying staff bonuses can be a great way to incentivize your employees. However, it adds some extra steps into your payroll process! 

Employee bonuses and staff allowances are both payments that you can add to your staff’s regular wages. This could be in exchange for hitting targets, as a new employee signing incentive, or around holidays like Christmas. 

This article will explain what staff bonuses and allowances are, how to reimburse allowances, what tax you need to pay on staff bonuses, and how to run bonuses through payroll software. 

An employee bonus is anything that you pay them on top of their regular hourly rate or salary. A bonus could be either: 

• Regular (treated as employee earnings/PAYE)
• Once off/Once a year (treated as a “lump sum”, also covers redundancy payments)

This is usually an incentive, based on their work performance or as part of their signing package. You might pay them based on sales targets, or as an annual bonus to incentivize hard work. 

Bonuses can be regular, annual or one-off depending on how you have structured them in employee agreements. How you structure it will determine how it is taxed when you create their payslip in payroll. 

Like bonuses, employee allowances are payments that you make on top of employee wages for specific expenses. They are slightly different to incentive bonuses and are also generally taxed in a different way.

You might choose to give employee allowances to cover the cost of things like travel, meals and accommodation. Basically, employee allowances mean that you are reimbursing workers for costs incurred while working for you. 

Some employee allowances are taxed according to their regular PAYE income tax, while others are tax-free. Taxable allowances are taxed by gross wage plus allowance and applying PAYE over that total. Untaxable allowances are paid by paying the employee net wages plus allowance.

Accommodation allowances cover the cost of staying elsewhere. This could be for a conference or training and you choose to reimburse personal costs. 

In general, accommodation allowances are taxed through PAYE. However, there are different ways of taxing depending on whether the employer provides the accommodation versus where an employee pays for the accommodation.

Meal and clothing allowances are generally tax-free. This kind of allowance might cover the cost of meals while they are working offsite for you, as well as things like uniforms or protective gear that they need as an employee. 

You may give travel allowances to cover the cost of traveling between home and work. This is taxed through PAYE unless one of the following circumstances applies: 

• Working outside their normal hours, eg overtime, shift or weekend work
• Carrying work-related tools and equipment, eg the employee usually takes the bus to work but must use a taxi or their own vehicle to transport work-related gear
• Traveling to do something you need done for your business
• Who have a temporary change in workplace
• With no adequate public transport system serving their workplace.
• List source: Business.govt.nz

Benefits are like allowances except that you pay them on a regular, recurring basis. 

For example, a meal allowance might cover an employee while they are traveling to a conference or training. In comparison, a meal or food benefit might cover daily meals from a canteen. 

The biggest difference is that benefits are subject to Fringe Benefit Taxes (which we go over in more detail below). 

Payroll digitisation is the simplest way to ensure you are paying the right taxes on allowances and benefits. You can read more about your tax obligations for employee allowances and benefits here. 

Staff bonuses are taxed based on their type and frequency. If you use a payroll software like Smartly for payroll processing, these taxes will be calculated automatically based on employee tax codes and gross income. 

There are three main types of staff bonus taxes you need to be aware of. 

Bonuses and allowances are either taxed via PAYE for every paycheck or are tax-free. Here is a basic rundown of what taxes you need to pay on different types of bonuses: 

• Regular bonuses (e.g. sales targets)- PAYE, deducted from every applicable paycheck 
• Lump sums (e.g. Christmas bonus)- PAYE, see the calculations below 
• Travel allowance - PAYE OR tax-free if you are giving a travel allowance for one of the reasons listed in the section above 
• Accommodation allowance - PAYE 
• Meal and clothing allowance- Tax-free (unless under benefits instead of allowance)

The amount of tax you pay on bonuses will depend on each individual employee's tax bracket. It is always a good idea to check with IRD or your accountant/bookkeeper if you are unsure whether a bonus or an allowance is taxable.

If you are reimbursing employee allowances, you do not pay tax on this. It is added to the employee’s net pay after PAYE has been taken out and paid alongside their regular wages. You can find more details on reimbursing allowances here. 

Lump sum bonuses are taxed as part of your employee’s PAYE. 

If you don’t have payroll software, you can use the following steps from Business.govt.nz to calculate the right amount of tax:

1. Work out what your employee has earned (before PAYE) over the past four weeks.
2. Multiply this figure by 13.
3. Add the lump sum payment to the figure in step two.
4. Use the table below to work out what income bracket your employee is in.
5. Deduct PAYE from the lump sum payment at the employee’s tax rate

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Fringe benefit taxes (FBT) apply to benefits but not allowances. It is important that you differentiate between bonuses, allowances and benefits so that you know what taxes to pay. You need to register for FBT when you start providing a fringe benefit. If you provide fringe benefits but are not registered yet, you need to back date your registration to when you first provided a fringe benefit. 

There are four main types of FBT that you need to pay if you offer employees benefits: 

• motor vehicles available for private use
• free, subsidized or discounted goods and services
• certain low-interest loans
• employer contributions to some funds, insurance and superannuation schemes.
• List source: business.govt.nz

Unlike PAYE, FBT returns can be filed quarterly or annually.  

FBT can get expensive if you don’t understand how and when to pay them. If you are thinking about giving employees benefits as part of their employment agreement, make sure you read the Guide To FBT to avoid big unexpected tax bills.

With automated payroll software, adding a bonus will be relatively straightforward. 

Jump over to our help centre to learn how bonuses are added to running a pay in Smartly.  

If you offer bonuses as part of their employee agreement/package, then the bonus contributes to their overall annual salary. That means that it will be included in the annual leave payment calculations.  

Bonuses and allowances can be a great way to reward and incentivize employees for their work. However, paying bonuses and deducting the right amount of tax can be confusing! Smartly is the easy way to pay bonuses, create payslips and pay the right tax every single time. 

Ready to see how simple paying staff bonuses and processing payroll can be? Get started with Smartly today!

Not using Smartly yet?

If you want to learn more about how your day-to-day tasks can be made simpler, you can chat to us to get some insight on how payroll software could benefit your business. Smartly can make the complex tasks seem simple including payroll, timesheets, leave and more! Smartly takes care of most of the faffing, so you can focus on the important stuff.

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