How Christmas bonuses affect taxable income and payroll tax

With Christmas just around the corner, you might be thinking about showing your appreciation for the hard work done by all your employees during the year.

The traditional way is by paying a cash bonus, but there are other ways to spread your largesse this year and they each come with different tax implications which I’ll explore in more detail in this article.  

What is a Christmas Bonus?

A Christmas bonus is an additional sum of money that employers provide to their employees during the festive season. Typically, businesses give bonuses as an expression of gratitude to recognise the hard work of their employees. 

Why Should You Give a Christmas Bonus?

Basically, because it builds employee goodwill, which could come in very useful for next year. However, the benefits can be broken down into their wider constituent parts as follows: 

• Motivation – Christmas bonuses can act as a powerful motivator for your employees. Recognising and rewarding their hard work does wonders to improve morale and productivity.
• Employee Retention – Providing bonuses can help retain your valuable team members. When they feel appreciated and acknowledged, employees are more likely to stay with your business.
• Competitive Advantage – A Christmas bonus can make your business appear more appealing to potential new hires, giving you a better chance of attracting the best talent for your business. 
• Enhancing Holiday Spirit – A Christmas bonus contributes to the festive atmosphere.

Giving Christmas bonuses is not something you are required to do. As a business owner, it’s up to you to determine if providing bonuses aligns with your financial capabilities, company culture, and overall business needs. 

While some businesses have a tradition of providing holiday bonuses, others may prefer alternative ways to recognise their employees. If you decide to offer Christmas bonuses, you should communicate your decision to your employees and establish a fair and transparent system for determining eligibility and the amount of the bonus.

Christmas Bonus Options

Christmas bonuses can come in many forms, and the one you choose depends on your budget constraints and what your employees would appreciate the most. The most common way to pay out a bonus pot include:  

• Cash Bonus: This is the most common type of Christmas bonus, and it involves giving your employees a monetary reward. The bonus can be given in the form of a fixed percentage of their annual salary or a flat rate where all your employees get the same amount. Something to consider is the individual performance of employees and the time they spent at your business. 
• Profit sharing: If your business had a successful year, you can distribute a portion of the profits among your employees as a bonus. This method links employee rewards with your business’s performance.
• Other Rewards or Perks: If you have established that you cannot give a bonus this year, there are other options to reward your employees. Here are some examples:
  • Gift Cards: You can give your employees gift cards from popular retailers or online platforms. Gift cards allow employees to select their own holiday gifts, making them a good way to reward employees.
  • Additional Paid Leave: Offering extra paid leave during the holiday season can be valuable. It gives employees the chance to spend more quality time with their families for the festive period.
  • Company Gifts: Instead of cash, you have the choice to purchase thoughtful gifts for your employees. These could include personalised items or useful technology. If you decide to buy the gifts yourself, you may need to know your employees well to avoid disappointment. 

The Tax Implications of Christmas Bonuses

It is possible to motivate and retain your employees with a Christmas bonus, however, you will need to take into account the tax implications as well. Let’s explore what you can expect when distributing these bonuses:

Superannuation Guarantee (SG)

The ATO considers a Christmas bonus to be part of an employee’s salary or wage. This means that you are required to contribute 11.5% (from 1 July 2024 to 30 June 2025) of an employee’s ordinary time earnings to their superannuation fund, including any Christmas bonuses you provide.

PAYG Withholding 

Christmas bonuses are considered part of your employee’s taxable income. This means that it is important to withhold the appropriate amount for PAYG when giving out Christmas bonuses, taking into account your employee’s annual income and tax bracket. Any cash bonus you give your staff will need to be reported as normal income to the ATO. Cash bonuses must be reported as normal income to the ATO. Through Single Touch Payroll (STP), directors should ensure proper recording, including PAYG withholding and superannuation payments.

Paying your employees a Christmas cash bonus may drive them into a higher tax bracket and affect their Medicare levy surcharge.

Cash bonuses for Christmas will need to be calculated manually as your software won’t be able to detect the different being a bonus and a weekly wage. It’s important to let the ATO know that this is a once-off payment as bonuses paid throughout the year are recoded differently.

To work out the tax payable for each employee, you will need to add the cash bonus to their salary or wage for that pay period and work out the tax on the total amount for a once off payment.

Payroll Tax

Payroll tax is a state-based tax imposed on businesses in Australia. Since a bonus is part of an employee’s wage or salary, your business will need to pay payroll tax on it. The rate you have to pay depends on the state or territory your business is located in.  

Fringe Benefits Tax (FBT) 

If your reward is given in a form other than a bonus, such as gifts, entertainment, or non-cash benefits, it’s essential to consider the Fringe Benefits Tax (FBT) implications. If the value of the gift you give your employees is less than $300 per person then the “minor benefits exemption” may apply and it wouldn’t be considered a fringe benefit. 

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