Tax treatment of extra pays
2009 amendment introduces a withholding tax rate for extra pays, lump sum employee payments that are not related to overtime or regularly included in a pay period.
Sections RD 10(2), RD 17(2), (3) and (4) and schedule 2, part B, table 1 of the Income Tax Act 2007; section 33A of the Tax Administration Act 1994
A consequential amendment to the Income Tax Act 2007 introduces a new 12.5% withholding tax rate for extra pays.
The amendment aligns the tax rate for extra pays with the new personal tax rate of 12.5% introduced in 2008 for individuals whose income is under $14,001 a year.
Background
"Extra pays" are lump sum payments made to employees that are not related to overtime worked and are not regularly included in a pay period. They include bonuses, gratuities, back-pay, profit shares and retiring allowances.
A remedial amendment has also been made to the extra pay rules to more accurately withhold tax on extra pays earned in a job where a secondary tax code is used.
Key features
12.5% withholding tax rate
Section RD 17(2) and schedule 2, part B, table 1 introduces a new bottom rate of 12.5% for extra pays to align with the new personal tax rate structure. It ensures that tax on a lump sum payment received by a person who earns under $14,001 a year will be withheld correctly.
Extra pay in secondary jobs
New section RD 17(3) and (4) more accurately withholds tax on extra pays earned in a job where a secondary tax code is used. It ensures that people who receive an extra pay relating to secondary income have tax withheld on that income at a rate which reflects their extra pay income, their secondary income and a proxy for their primary income.
Employee's option to choose rate
Section RD 10(2) has been amended to allow an employee to choose a 21% rate for extra pays if they expect their taxable income to be under $48,001.
Application date
The amendments apply from 1 April 2010.