How to set up Bonuses and Commissions Pay Items

Overview

Bonuses and commissions are employment payments used to reward results, motivate employees’ performance, or recognise service. Generally, they are supplementary payments paid on top of regular wages and salaries.

Differences between Bonuses and Commissions

Essentially, both payment types serve similar purposes. The way they are paid to employees and their tax calculation methods are the same.
While the terms are often used interchangeably in the workplace, the core differences between bonuses and commissions lie in certainty versus discretion:

• Commissions ⇒ are typically contractual, ongoing, and mathematically tied to specific sales or revenue metrics (such as a fixed percentage of a deal);
• Bonuses ⇒ are usually discretionary, lump-sum rewards (such as an annual, Christmas, or sign-on payment) tied to broader company profits, milestones, or overall individual performance.

Additional differences also apply to STP reporting and superannuation:

• Commissions ⇒ always count as Qualifying Earnings from 1 July 2026, so they always attract superannuation. All commission payment types are reported under the STP Category: Bonuses & Commissions.
• Bonuses ⇒ most bonuses are treated the same way as commissions. However, depending on why they are paid, certain bonuses (such as overtime bonuses or return-to-work incentives) must be reported under different STP categories, and bonuses paid entirely for overtime work do not attract superannuation.

Purpose, STP Category and Superannuation Implications

Tax Implications

The ATO deems bonuses and commissions as “Lump Sum” payments, recognising that if a large payment made in one pay run were taxed using the same tax scales applicable to regular wages and salaries, these amounts would be overtaxed, when looking at the individual’s overall annual income. To avoid this, the ATO applies specific tax calculations to Lump Sums, acknowledging these payments cover longer periods than the specific pay run.
The principle behind these tax calculation methods is to spread the tax calculated on the lump sum across the Financial Year, rather than penalising the employee in a single pay cycle. The tax methods for Lump Sums are:

• Method A (Schedule 5) ⇒ spreads the lump sum payment evenly across the Financial Year (or the specified accrual period) and calculates the extra tax based solely on the employee’s current pay period regular earnings.
• Method B(ii) (Schedule 5) ⇒ calculates tax using the employee’s average earnings across the Financial Year to date, instead of looking at just the isolated pay cycle. It factors in pay rises and fluctuating pays over the year, making it the more accurate method.

When setting up Bonus or Commissions Pay Items in Xero Payroll, Xero automatically applies Method B(ii).

Fair Work Restrictions

The Fair Work Ombudsman specifically states that bonuses and commissions must be paid on top of an employee’s base wage or salary.
For almost all employees, bonuses or commissions cannot be their sole source of income; they remain legally entitled to receive at least their minimum base rate under their applicable Modern Award, Enterprise Agreement, or the National Minimum Wage (for Award-free staff).

However, Fair Work recognises limited exceptions under specific Modern Awards where eligible employees can be engaged on a commission-only basis:

• Real Estate Industry Award: Applies to eligible employees classified in property sales or specified commercial/industrial leasing roles.
• Commercial Sales Award: Applies to eligible employees classified as commercial travellers or merchandisers.
  Strict eligibility criteria and ongoing minimum income threshold rules apply to these commission-only arrangements, and employers must regularly review earnings to ensure compliance.

Impact on Payroll Tax and Workers’ Compensation Reporting

All types of commissions and bonuses are deemed assessable remuneration for both Payroll Tax and Workers’ Compensation.

Set Up a standard Bonus/Commission Pay Item

1. In Xero, go to Payroll  ⇒ Payroll Settings
2. Select the [Pay Items] Tab ⇒ [Earnings]
3. Click on [Add] ⇒ Bonuses and Commissions
   • ➡️ The Pay Item screen
     
4. Select/Enter the following details:
   • Earnings Name ⇒ Type: Bonus (or Commissions)
   • Display Name ⇒ Type: Bonus (or Commissions)
   • Rate Type ⇒ Select: Fixed Amount
   • Amount ⇒ Leave blank
   • Expense Account ⇒ Select either: Wages & Salaries or Bonus and Commissions
   • Exempt from PAYG withholding ⇒ do not select this option
   • Include in superannuation calculation  ⇒ select this option
   • Report as qualifying earnings ⇒ select this option
   • Reportable as W1 on Activity Statement ⇒ select this option
5. Click on [Add]

Set Up an Overtime Bonus Pay Item

1. In Xero, go to Payroll  ⇒ Payroll Settings
2. Select the [Pay Items] Tab ⇒ [Earnings]
3. Click on [Add] ⇒ Overtime Earnings
   • ➡️ The Pay Item screen
     
   • 
4. Select/Enter the following details:
   • Earnings Name ⇒ Type: Overtime Bonus
   • Display Name ⇒ Type: Overtime Bonus
   • Rate Type ⇒ Select: Fixed Amount
   • Amount ⇒ Leave blank
   • Expense Account ⇒ Select either: Wages & Salaries or Bonus and Commissions
   • Exempt from PAYG withholding ⇒ do not select this option
   • Include in superannuation calculation  ⇒ do not select this option
   • Report as qualifying earnings ⇒ do not select this option
   • Reportable as W1 on Activity Statement ⇒ select this option
5. Click on [Add]
   Note: Overtime Bonus Pay Items, are taxed using the regular tax tables as standard wages and salaries in Xero.

Record a Bonus Payment

1. Go to Payroll ⇒ Pay Employees
2. Click on [Add Pay Run]
3. Select the correct pay frequency/calendar period
   • ➡️ The Draft Pay Run
4. Open the employee’s pay entitled to the bonus/commission payment
5. Click on [Add Earnings Line]
   • ➡️ The Add Earnings Line Pop-up
     
6. Select the Bonus (or commission) pay item from the list and click on [OK]
   • ➡️ The Bonus/Commission pay item line is added to the Employee’s pay
7. Click on [Save] and post the pay run

Training Video

Disclaimer
This educational material is for general purposes only and does not constitute legal advice. The information provided in this guide is current as of November 2026. Rulings and regulations may change, always check official government websites for the most up-to-date regulations. Additionally, as software features are continuously improved, screen displays and interfaces showcased may differ from the current version of the application.