Method B: Calculating withholding amounts on lump sum payments using Method B(ii)

This article outlines the steps involved in calculating the withholding amount (PAYG and STSL) on a lump sum payment when using Method B.

In accordance with the ATO, the Method B option should be used when either processing:

• back payments relating to a prior financial year; and/or
• any additional payments (including commissions, bonuses or similar payments) that don’t relate to a single pay period regardless of the financial year the additional payment applies to.

This method calculates withholding by averaging all additional payments made in the current financial year over the number of pay periods in a financial year, and applying that to the average total earnings to date.

To process a lump sum payment using Method B;

1. Open the Payrun > open the employee payrun
2. Click on Actions > Add Lump Sum payment. An earnings line will appear. (please see the image below)

    3. Ensure the following actions are completed:

• Select the pay category,
• Ensure the correct location is selected, 
• Enter any notes if applicable (optional),
• Enter the unit(s) if it differs to the default value of "1",
• Enter the lump sum rate/amount,
• Select "Method B(ii)" from the calculation method dropdown.  

• Click Save. a tooltip will appear to the right of the "Method B(ii)" label. 

Clicking the tooltip will open a context panel containing details of how the withholding amount has been calculated as per the ATO's guidelines.  

Interpreting the data in the context panel

Each step includes a tooltip that explains how each value was determined as per the below screenshot:

Maximum amount withheld

There is a withholding limit of 47% on tax withheld from any lump sum payments using Method B(ii). As such, you will notice the final amount withheld will never be higher than the amount calculated in this step.

Applying this withholding limit may result in withholding not being sufficient to cover some employees' end of year tax liability. In these situations, an employee can ask their employer to increase their withholding for the remainder of the financial year. To do this, you would need to process a PAYG adjustment in the employee's pay. 

Working Holiday Makers & Lump Sum Payments

Employees defined as working holiday makers are not subject to this method when calculating the withholding amount on lump sum payments. Rather, working holiday makers are taxed in accordance with the Tax table for working holiday makers. As such, when entering a lump sum amount for a working holiday maker, you will not be asked to select a calculation method.