Processing Commission and Bonus Payments in Xero

This article will take you through the steps of processing a commission or bonus payment through Xero's payroll.

• Calculating Commissions/Bonuses
• Superannuation on Comissions/Bonuses
• Setting up the Pay Item 
• Processing an unscheduled pay run

Calculating Commissions/Bonuses

When calculating the commission or bonus to be paid to your employees, you need to calculate this based on the Gross amount - the amount before tax. When processing the payrun, tax is withheld, so the amount that is paid into the employee's bank account will be less than the Gross amount. Xero will calculate the correct tax to withhold.

Superannuation on Commissions/Bonuses

Generally, superannuation of 9.5% is liable to be paid on commissions/bonuses. If superannuation is liable, you need to determine if the commission/bonus should be inclusive or exclusive of superannuation. Keep an in mind the total cost you want to incur for the business. 

If the amount is meant to be inclusive, you will need to divide the gross commission/bonus by 1.095. This amount will be the gross wages in the pay run.

Example. $1,000 bonus inclusive of superannuation is entered as $913.24 gross wages. Total cost to the business is $913.24 of gross wages and $86.76 of superannuation ($1,000).

Setting up the Pay Item

Follow these steps to add a new pay item called "Commission" or "Bonus" with the following settings (if there is already a pay item set up, check that it is set up as per below):

• Ordinary Time Earnings
• Fixed Amount
• Expense Account: Wages and Salaries
• Reportable as W1 on Activity Statement

Processing an unscheduled pay run in Xero

1. Ensure that the usual pay run for the period has been posted with any leave taken in that period processed.
2. Add a new payrun and in the select a pay period dialog box, select “Unscheduled pay run”
3. In the dialog boxes that pop up:
   • For select a payroll calendar, ensure the employee's pay calendar is selected
   • For select unscheduled pay period, select the period in which the payment will be made. Click Next.
4. You will be taken to the new pay run where you can select the employees that you want to include a commission or bonus for. A green circle should appear under “Included” next to their name.
5. Click on the employee’s name to see their payslip details.
6. Delete the pay items that may be there by default.
7. Click on the “+ Add Earnings Line” button, and in the dialog box, for “Earnings Rate” select the commission or bonus pay item.
8. Enter in the Gross amount to be paid to the employee (that you’ve calculated above). When this is entered, PAYG Tax and Super obligations will automatically be calculated in the payslip.
9. Delete any leave and reimbursement lines, if applicable.
10. Repeat steps for additional employees, and post the pay run.
11. Pay employees the NET PAY amount detailed on their payslips.