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 How to Process Christmas Bonuses in Xero

Hi Friends,

With Christmas only a few sleeps away, you might considering how you can show your appreciation to your hardworking teams. One option is to pay a Christmas bonus. Today, I’m going to walk you through the simple steps of handling Christmas bonuses in Xero – it’s easier than you might think!

Step 1: Consider Your Company Policies regarding Bonuses First things first! Before you start crunching numbers, make sure to review your company’s policies or employee agreements regarding bonuses. What are the criteria to determine who receives a bonus and how will be bonus be calculated( fixed amount or a percentage of salary)? Document these policies and file somewhere safe. This step is crucial to ensure compliance and accuracy.

Step 2: Set Up the Bonus Payments in Xero Now, let’s get into Xero. If you haven’t already set up a pay item for bonuses, here’s how to do it:

• Go to ‘Payroll’ in Xero, Payroll Settings and select ‘Pay Items.’
• Under the ‘Earnings’ tab, click ‘Add’ to create a new pay item for the bonus.
• Select the preset category Bonuses and Commissions
• Add an appropriate name for the Bonus, the rate type and the account it will be posted to ( you could use wages / salaries or you could set up a separate account in your chart of accounts called Bonus Payments.)

Note that tax and superannuation are applicable in most circumstances ( see below) so do not tick exempt from PAYG nor exempt from Superannuation Guarantee Contribution.

Step 3: Process the Bonus Payments

With the bonus amounts ready and the bonus pay item set up in Xero, you’re all set to process the payments. Here’s how to do it :

• Go to the ‘Pay Employees’ section in Xero.
• Add a new pay run for the bonus period – you can do this within an existing payroll or you can run a separate “ bonus “ payroll using the unscheduled payroll option.
• Select each employee receiving a bonus and enter the bonus amount under the ‘Christmas Bonus’ pay item.

Australian Tax Treatment of Bonuses In Australia, Christmas bonuses are subject to income tax, just like regular wages. Xero automatically calculates the tax on the bonus based on the Australian Tax Office (ATO) guidelines, by adding the bonus to the average amount of wages paid during the year. Ensure that the bonus amounts are entered correctly, and Xero will take care of the PAYG (Pay As You Go) withholding tax calculations.

No changes are required to this calculation by Xero unless the bonus is specific to that payroll period ( ie “thanks for working so hard over the last month” ) and doesn’t represent appreciation for the whole year. If you are unsure of the appropriate tax treatment please contact your friendly BAS agent ( me) and I can help you.

Superannuation on Bonuses Superannuation contributions are also applicable on Christmas bonuses, unless they are in payment for overtime worked. Xero automatically marks the pay item as ‘Superannuation Guarantee Contribution (SGC)’ eligible. This means that Xero will automatically calculate the 11% superannuation guarantee on the bonus amount, ensuring compliance with Australian superannuation laws.

Step 4 : Review and Approve the Pay Run After entering the bonus amounts and ensuring the correct tax and superannuation settings, review the pay run. Double-check the amounts, tax calculations, and superannuation contributions. Once everything looks accurate, approve the pay run. Xero will process the payments, including the tax withholdings and superannuation contributions.

Step 5: Notify Your Team Communication is key! Let your team know when they can expect their bonus payment. This is a good chance to let your team know that you appreciate their contributions so that you can celebrate together.

Step 7: Reporting and Record Keeping After processing the payroll send the employees their payslips and complete the Single Touch Payroll lodgement to the ATO.

And that’s it! You’ve successfully processed Christmas bonuses in Xero. Not too complicated, right? This small act of appreciation can boost morale and bring joy to your team. Remember, if you ever get stuck, Xero’s support and community forums are great resources and you can always contact Balanced Advantage for help.

Wishing you a happy and relaxing holiday season! See you in the New Year.

Deanna