This guide explains how to calculate tax withholding on lump sum payments using Method A. If you need instructions for Method B(ii), you can find them here.
When to Use Method A
The Australian Taxation Office (ATO) allows Method A for any additional payments, regardless of the financial year they apply to. This includes:
- Back payments
- Commissions
- Bonuses
- Other similar payments
How Method A Works
Withholding is calculated by:
- Apportioning the lump sum over the number of pay periods the lump sum relates to
- Adding the average amount to the employee's regular earnings for the current pay period
- Applying the appropriate tax rate
Special Cases
- Seasonal Workers: Employees in the Seasonal Worker Program (marked as such in their Tax File Declaration) are taxed under ATO special withholding tables. Using the lump sum action will not change their tax rate.
- Working Holiday Makers: These employees are taxed under the Working Holiday Maker Tax Table, so Method A does not apply to them. When processing a lump sum for a working holiday maker, you will not be asked to select a calculation method.
How to Process a Lump Sum Payment in a Pay Run
- Open the relevant pay run
- Select the employee's name
- Click the Actions button Add Lump Sum Payment
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Complete the following:
- Select the pay category
- Choose the correct location
- Add any notes (optional)
- Enter the units (if different from the default "1")
- Enter the lump sum amount
- Choose "Method A" from the calculation method dropdown
- Enter the number of pay periods the lump sum relates to
💡 Tip: After saving, an info icon appears next to the PAYG amount in the employee's earnings summary. Click it to open the context panel showing a breakdown of how the withholding amount was calculated based on ATO guidelines.
Understanding the Context Panel
Each step in the calculation is displayed in the context panel, showing how the values were determined. You can also export the data to Excel or PDF.
Maximum Tax Withholding Limit
- The maximum tax withholding on lump sum payments using Method A is 47%.
- If an employee's withholding is too low, they can request an increased withholding for the rest of the financial year by processing a PAYG adjustment in their pay.