What is a lump sum payment (extra pay)?

A Lump Sum Payment, also known as Extra Pay, is a one-off payment to an employee. A lump sum can be paid for many reasons including certain types of bonuses, cashed-up annual leave, redundancy payments and back pay. Regular payments or overtime are not lump-sum payments.

IRD has a helpful article about calculating tax on lump-sum payments, but here is the step-by-step process outlined by Business NZ:

• Work out what your employee has earned (before PAYE) over the past four weeks.

• Multiply this figure by 13.

• Add the lump sum payment to the figure in step two.

• Use this tax rates article to work out what income bracket your employee is in.

• Deduct PAYE from the lump sum payment at the rate shown in the right-hand column for that income bracket.

PayHero can directly add Lump Sum Payments into an employee’s pay using Pay Items. To ensure it’s being taxed correctly, the frequency can also be adjusted and PayHero will automate this payroll process.