The Marginal Tax calculation process is for bonus and commission payments so they can be taxed over the period in which they are earned. When the period in which the bonus or commission was earned differs from the employee’s regular pay frequency, the tax must be calculated at the employees’ marginal rate.
Marginal tax is calculated by comparing an employee’s actual earnings and tax within a defined period to what their earnings and tax would have been had the bonus or commission been paid as it was earned over the period instead of paid as a lump sum.
The tax will be calculated including any STSL (Study and Training Support Loans) using Method A and the total Tax withheld will be limited to 47%. This is as per the ATO, for more information refer to Work out the Withholding Amount on the ATO link below:
Enter the Amounts
The Pay Period used to process the Bonus/Commission payments is one of the most important pieces of data to enter. The period selected is the date used to gather the earnings required in the marginal tax calculation. More information on this can be found in the Help Centre article Current Gross Earnings here.
Open either a Standard or Manual Payrun.
If paying outside of the normal pay then it is recommended you use the last completed processed pay period dates when creating your payrun.
Once your payrun has been opened and calculated, there are numerous ways you can use to enter your marginal payment:
UI
In the individual employee pay calculation, select Add Line Item.
Select the Pay Item and the Taxable Period.
Enter the units and rate applicable and click Save.
Note: The Taxable Period will now default to Annually for convenience.
Bulk Add
In the pay run details screen, select the employees you wish to add a marginal payment for and select Bulk Add Pay Items.
Select the Pay Item and the Taxable Period.
Enter the units and rates applicable and click Apply & Recalculate.
Note: The Taxable Period will now default to Annually for convenience.
Workbook
Please see the Help Centre article on how to use the Pay Item Import spreadsheet for more information.
Note: Leaving the Taxable Months column blank will default it to the Current Pay Period.
Taxable Months input
NULL | = Current Pay Period |
1 | = Monthly |
3 | = Quarterly |
6 | = Bi-Annually |
12 | = Annually |
Calculation
Step | Instruction |
1 | Work out your employee’s current gross earnings excluding any additional payments for the current pay period. Ignore any cents. |
2 | Use the relevant tax table to find the amount to be withheld from your employee’s gross earnings in step 1. |
3 | Add any additional payments to be made in the current pay period together and divide the total by the number of pay periods in the taxable period selected. |
4 | Add the amount at step 3 to the gross earnings at step 1. |
5 | Use the relevant tax table to find the amount to be withheld from the amount at step 4. |
6 | Subtract the amount at step 2 from the amount at step 5. |
7 | Multiply the amount at step 6 by the number of pay periods used in step 3. |
8 | Multiply the additional payment being made in the current pay period by 47%. |
9 | Use the lesser amount of step 7 and step 8 for the withholding on the additional payment. Ignore any cents. |
10 | If paying the bonus at the same time as the normal earnings then work out the total PAYG withholding for the current pay period by adding the withholding on the additional payment (step 9) to the withholding on the gross earnings (step 2). |
Example
Jason is a salaried employee earning $10,000.33 per month. He is paid a yearly bonus of $25,000 in the July 2025 pay with his normal salary.
Pay Period - 01/07/2025 - 31/07/2025
Payment Date - 14/07/2025
Step | Answer |
1 | $10,000.00 |
2 | $2,435.00 |
3 | $2083.33 |
4 | $12,083.33 |
5 | $3,159.00 |
6 | $724.00 |
7 | $8,688.00 |
8 | $11,750.00 |
9 | $8,588.00 |
10 | $11,123.00 |
Note: PAYG is calculated on a weekly basis regardless of the Pay Calendar based on the Coefficients supplied by the ATO. Therefore a manual calculation may vary slightly to the calculation in Definitiv.
All best efforts are made to calculate the appropriate amount of PAYG on a non standard pay item however only the information within Definitiv can used, therefore if you disagree with the calculation please manually update.
Adjustments
We get it, sometimes mistakes can happen. If you need to adjust a bonus payment you will need to use the same pay period date as the original, otherwise; a separate marginal tax calculation will occur.
You can increase or decrease the marginal payment amount to a minimum total value of $0.00. The system will calculate the tax on the new total, deducting any amounts already processed. If reversing a portion or the entirety of the payment, Definitiv will refund the overpaid PAYG Amount.
You can also update the Taxable Period used by negating out the bonus on the old taxable and re-entering it with the correct period, as long as the value of the combined marginal payment is $0.00 or greater.
Messaging
To assist end users with how the PAYG was calculated we have introduced messaging which contains all relevant information:
Marginal PAYG calculated on the payment
Marginal Payment that was entered
Taxable Period that was selected
Current Earnings that were used
Pay Period Dates the current earnings were summed for
Scenario | Message |
Marginal Taxed Payment + Current period’s earnings found | "Marginal tax of $X.XX was calculated on the marginal payments of $Y.YY over Z months. The earnings of $A.AA for the period DD/MM/YYYY - DD/MM/YYYY was used for calculation." |
Marginal Taxed Payment + No Current period’s earnings found | "No earnings were found for the period DD/MM/YYYY - DD/MM/YYYY when attempting to calculate the marginal tax component of PAYG. Please calculate and enter manually." |
Marginal Taxed Payment resulting in a negative marginal tax calculation | "Marginal tax calculation resulted in a negative value, therefore was reduced to $0.00. If required, manually adjust." |
Note: If any adjustments are paid the message will display the final combined amount.
Non Standard Tax Scales
The above is only based on standard tax scales, if your employee is paid on a non standard scale such as Working Holiday Maker, Seasonal Worker, or Downwards Variation please use a pay item that has been configured to tax as a standard tax, not marginal.