Christmas Bonus Tax Guide: How Are Christmas Bonuses Taxed?

Are Christmas bonuses taxed in Australia? The short answer is yes—Christmas bonuses count as part of your taxable income and are subject to withholding tax.

That might sound a bit complicated, but don’t worry. At My Tax Refund Today, we’re here to help break it down into plain English, so you know exactly where you stand.

This guide explains the methods used to calculate tax on your Christmas bonus as detailed on the ATO website (but in simpler terms), helping both employers and employees feel confident about the process.

How Are Christmas Bonuses Taxed?

Christmas bonuses in Australia are considered part of your taxable income, just like your regular wages.

When it comes to working out how much tax to withhold from a bonus, the Australian Taxation Office (ATO) provides specific methods to ensure the right amount is taken out.

If your Christmas bonus relates to work done over multiple pay periods (rather than just a single period), you’ll typically need to use either Method A or Method B(ii) to calculate the tax.

Each method has its own approach, and choosing the right one helps ensure accurate, fair withholding for both you and your employer.

Method A: The Straightforward Way

Method A is a simpler approach to working out the tax withheld on Christmas bonuses or other additional payments that relate to work done over more than one pay period. Here’s how it works:

1. Divide the Bonus:
   Break down the total bonus by the number of pay periods in the financial year. For example, if you receive a $1,000 bonus and are paid weekly, you divide $1,000 by 52 (the number of weeks in a year), giving you around $19 per pay period.
2. Add to Regular Earnings:
   Take that $19 and add it to your normal weekly wage. If you normally earn $1,500 per week, for this calculation, you’re now earning $1,519 ($1,500 + $19).
3. Apply the Tax Tables:
   Find the tax that would be withheld on $1,519 from the standard tax tables. Then subtract the amount you’d withhold on your usual $1,500 wage. The difference gives you the extra tax for that “slice” of the bonus.
4. Scale Up:
   Multiply that extra tax by the number of pay periods to find the total tax on the entire bonus amount. If that works out to be, say, $260 for the bonus, then that’s the tax you withhold from the bonus itself, in addition to what you’d normally withhold from the regular wage.

When to Use Method A:
If your Christmas bonus covers work done over several pay periods in the same financial year, Method A is often your best bet. It’s simple and splits your bonus evenly across the year’s pay periods, ensuring your tax is as fair as possible.

Example (James):

• James usually earns $1,500 per week.
• He’s given a $1,000 Christmas bonus for the year.
• First, divide $1,000 by 52 (there are 52 pay periods in a year if he’s paid weekly) = around $19 per pay period.
• Add $19 to his normal $1,500 wage this week, making it $1,519.
• Using the tax tables, work out how much tax to withhold on $1,519. Let’s say that comes to $290.
• Normally, on $1,500, the withholding would be $285. The difference ($290 – $285 = $5) is what applies to the bonus.
• Multiply that $5 by 52 weeks = $260 total tax on the bonus.
• Add that to the $285 tax on his normal wages, and you’ve got his total withholding.

It sounds like a lot of steps, but this method ensures James pays the right amount of tax on his Christmas bonus.

Method B(ii): For a Big Lump Sum

Method B(ii) is used when the bonus or additional payment doesn’t relate to a single pay period—often when it’s a lump sum that spans a long timeframe, multiple financial years, or is otherwise not tied cleanly to defined periods of work. This method is more detailed but aims to closely match the actual tax you’ll owe at year’s end.

1. Calculate Average Earnings:
   First, you find your average total earnings to date (including the current pay). This is done by adding up all the earnings so far in the financial year (including the bonus) and dividing by the number of pay periods.
2. Find the Extra Tax:
   Check the tax tables to determine how much tax would normally be withheld based on your average earnings. Then, add in the bonus amounts by averaging them over the year and see how that changes the tax figure.
3. Compare and Calculate:
   The difference between the tax withheld on your average earnings alone and the tax with the averaged-in bonus gives you the extra tax attributable to the bonus. Then, you adjust this amount for the whole year to find the total withholding.
4. Check Withholding Limits:
   Like Method A, Method B(ii) also has a 47% cap on the tax withheld from the bonus. If the calculation exceeds 47% of the bonus, it must be lowered.

When to Use Method B(ii):
If your bonus doesn’t relate to just one pay period and might span multiple months or even past financial years, Method B(ii) averages it out more accurately. While it’s a tad more complex, it generally results in a closer match to the tax you’ll owe by the end of the year.

Example (Laura):

• Laura earns $1,800 a fortnight.
• She receives a lump-sum bonus of $2,500 for work done over the year.
• Add her earnings so far, include the bonus, and then average it out by the number of pay periods.
• Compare this average to standard tax tables, work out the difference, and multiply to find the tax on the bonus.
• Let’s say the final calculation comes to about $728 in extra withholding for her bonus.

This ensures Laura’s tax is right on target without giving her a nasty surprise at tax time.

The 47% Withholding Cap

No matter how big your bonus, the tax office sets a maximum withholding rate of 47% on the bonus portion. This cap ensures you don’t end up paying more than what’s reasonable at the time of payment.

Example (Ethan):

• Ethan gets a $1,200 bonus, and he has a HELP debt.
• 47% of $1,200 is $564.
• If the calculated tax ends up being more than $564, it’s capped at $564. If less, you just go with the lower number.
• Suppose Method A calculates $350 tax, which is under the $564 limit. Ethan’s boss withholds $350.

This rule helps keep the withholding fair and manageable.

What If You Have a HELP or Other Study Loan Debt?

If you have a HELP debt or another study loan, don’t panic. The process is the same—you just do a similar calculation for your study loan debt. The result is extra withholding taken out for your loan repayments. This might mean slightly higher tax withheld now, but it could save you owing more money at the end of the tax year.

What If Your Bonus Is Non-Monetary?

Sometimes Christmas bonuses come in forms other than cash—like a gift card, holiday, or even a piece of equipment. These are often considered “fringe benefits” rather than regular pay.

1. Fringe Benefits Tax (FBT)
If your non-monetary bonus is considered a fringe benefit (e.g., a holiday or expensive gift), your employer may have to pay FBT. This tax is separate from your normal income tax. Employees generally don’t pay more income tax on these benefits if FBT has been applied by the employer.

2. Minor Benefits Exemption
A small non-monetary gift under $300, given infrequently and irregularly, may be exempt from FBT. For example, a $200 Christmas hamper would likely fall under this exemption, meaning no extra tax for you or your employer.

3. Reportable Fringe Benefits
If the benefit is above the minor threshold, it might be listed as a “reportable fringe benefit” on your payment summary. This doesn’t increase your taxable income but could affect things like HELP repayment thresholds or government benefit entitlements.

Examples:

• Gift Card under $300: Likely exempt from FBT and no extra income tax.
• $2,000 Holiday Package: Employer pays FBT; it might show as a reportable fringe benefit.
• $1,500 Laptop: If not treated as a fringe benefit, it may be considered taxable income for you, and extra PAYG withholding might apply.

In all cases, it’s wise to chat with your employer or a tax professional if you’re unsure how a non-monetary bonus affects your tax situation.

Tips for Employers and Employees

• For Employers:
  If you’re unsure which method to use, or how to apply it correctly, it’s a good idea to check the Australian Taxation Office (ATO) guidelines or speak with a tax professional. That way, you’ll ensure you’re doing the right thing by your staff and following the rules.
• For Employees:
  If you’re worried about the tax on your Christmas bonus, you can always talk to your employer or seek advice from a tax professional. Remember, if you think you’ll end up owing tax at the end of the year, you can ask for a variation to have more tax withheld now.

Conclusion

Christmas bonuses can make the festive season a little brighter, but it’s important to remember that they’re not tax-free. Using Method A or B(ii) ensures that the right amount of tax is withheld, and knowing how the system works means fewer surprises come tax time.

At My Tax Refund Today, we believe in taking the stress out of tax matters. Armed with the right information, you can confidently enjoy your holiday reward—knowing that your Christmas bonus (and its tax) is being handled correctly.