Bonus and Commission Payments are taxed in a specific way based on different scenarios.

This Knowledge article covers how to set up and pay Bonus & Commission Payments in Xero by applying the Tax Method B(ii) Schedule 5.

Set up the Bonus / Commission Pay Item

1. From the Organisation Menu go to Settings > Payroll Settings
2. Click on the [Pay items] > [Earnings] Tab
3. Click on [Add] > Bonuses and Commission
   
   è  The Pay Item screen opens
   
        
   
   
4. Select/Enter the following details:
   • Earnings Name > Enter: Bonus or Commission
   • Display Name > Enter: Bonus or Commission
   • Rate Type > Select: Fixed Amount
   • Amount > Leave blank
   • Expense Account > Select: Bonus/Commission or Wages Expenses
   • Exempt from PAYG > Locked as blank
   • Exempt from Super > Leave blank
   • Reportable as W1> Locked as blank
5. Click on [Add]

Record a Bonus Payment

1. Go to Payroll > Pay Employees
   è The Pay Runs screen opens showing all approved Pay Runs
   
   
2. Click on [Add Pay Run]
   
   
   
3. Select the correct calendar and period from the list and click on [Next]
   
   è  The Draft Pay Run is created showing all active employees
   
   
   
   
4. Open the employee’s pay entitled to the commission/bonus payment
5. Click on [Add Earnings Line]
   
   è The Add Earnings Line Pop Up window opens
   
   
   
   
6. Select the Pay Item: Bonus or Commissions and click on [OK]
   
   è The Bonus/Commission pay line is added to the Employee's pay
   
   
   
   è Xero automatically calculates the tax portion of the payment using Method B(ii) of Schedule 5. 
   
   
7. Click on [Save] and post the Pay Run