So you want to know: do tax brackets include bonuses? Yes, bonuses are simply included in your total taxable income and taxed at your marginal tax rate like regular income. There’s no special “bonus tax rate” in Australia.
How Bonuses Are Taxed
PAYG Withholding
When you receive a bonus, your employer withholds tax using standard PAYG withholding rates. This works exactly the same way as your regular salary:
- The withholding amount is based on your tax bracket
- It’s calculated using standard ATO tax tables
- There’s no special higher rate for bonuses
Final Tax Treatment
Your bonus is treated as ordinary income for tax purposes:
- Your bonus is added to your annual salary
- The total amount determines your tax bracket
- Tax is calculated on the combined amount
- Any discrepancy between tax withheld and tax owed is resolved in your tax return
Example Calculations
Scenario 1: $80,000 Salary with $5,000 Bonus
Base salary: $80,000
Bonus: $5,000
Total taxable income: $85,000
The bonus is simply added to your regular income and taxed according to the standard tax brackets. The PAYG withholding on the bonus payment would be calculated using the same tax tables as your regular salary.
Scenario 2: $120,000 Salary with $20,000 Bonus
Base salary: $120,000
Bonus: $20,000
Total taxable income: $140,000
In this case, some of the bonus might push you into a higher tax bracket, but it’s only the portion above the threshold that’s taxed at the higher rate.
Common Misconceptions
Myth 1: “Bonuses Are Taxed at a Higher Rate”
Reality: Bonuses are taxed at exactly the same rates as your regular income. There’s no special “bonus tax rate.”
Myth 2: “Refusing a Bonus Saves Tax”
Reality: Only the actual received income is taxed. Refusing a bonus to stay in a lower tax bracket usually results in less take-home pay.
Myth 3: “Bonuses Are Taxed Separately”
Reality: Bonuses are combined with your regular income for tax purposes.
Understanding Tax Brackets
How Progressive Tax Rates Work
When your bonus pushes you into a higher tax bracket, only the portion above the threshold is taxed at the higher rate. For example, using 2023-24 rates:
- Income up to $18,200: No tax
- $18,201 to $45,000: 19%
- $45,001 to $120,000: 32.5%
- $120,001 to $180,000: 37%
- Over $180,000: 45%
So if your salary is $115,000 and you receive a $10,000 bonus:
- The first $5,000 of your bonus (up to $120,000) is taxed at 32.5%
- The remaining $5,000 is taxed at 37%
Wrap Up
While bonuses are initially subject to higher withholding rates, they’re ultimately taxed as part of your total income using standard tax brackets. Understanding this can help you better plan for bonus payments and manage your tax obligations effectively.
Key Takeaways
- Bonuses are part of your total taxable income
- Final tax is based on total annual income
- Tax planning can help manage the impact
- Professional advice may be beneficial
- Keep good records of all payments
