Method A Withholding

Method A is one of two ATO-approved methods for calculating Pay As You Go (PAYG) withholding on additional payments made to employees, including back payments, bonuses, commissions, and similar payments that relate to more than one pay period, or to an undefined period.

Method A calculates withholding by apportioning the additional payment made in the current pay period over the number of pay periods in a financial year, and applying that average amount to the gross earnings in the current pay period. It is the simpler of the two approved methods and is suitable for most common additional payment scenarios.

Method A is defined under Schedule 5 of the ATO's PAYG withholding tax tables, the tax table for back payments, commissions, bonuses, and similar payments. It should not be used for payments that relate to a single pay period only.

The role of Method A in payroll

• For employers: Method A provides a straightforward, ATO-compliant approach to calculating withholding on additional payments. It is widely used in payroll software and is accepted by the ATO, though it may result in slightly less precise withholding than Method B in some circumstances.
• For employees: The withholding amount calculated using Method A may not always closely approximate the actual tax payable at year end, particularly for higher-income employees or those with additional financial obligations such as HELP debt. In these cases employees may wish to arrange upwards variation with their employer.

When to use Method A

Method A applies when an employer makes an additional payment to an employee that relates to more than one pay period or to an undefined period. Common examples include:

• Annual or quarterly bonuses
• Commission payments covering multiple pay periods
• Back payments of salary or wages reltaing to a pay rises
• Allowance paid in arrears

If a commission, bonus, or similar payment relates to a defined period of less than 12 months, the employer may choose to base the withholding calculation on the number of pay periods the payment actually covers, rather than the full financial year.

How Microkeeper handles Method A

Microkeeper supports Method A in two ways.

• First, the Microkeeper payroll platform includes a built-in feature that lets payroll managers select the tax method: Method A or Method B(ii), for each individual payment line on a payslip, such as commissions or bonuses. This means the correct withholding is applied at the line level within the pay run itself.
• Second, for anyone wanting to calculate or verify withholding outside of a pay run, Microkeeper's free online Method A and B(ii) calculator is available, no login required.

FAQs about Method A

When should I use Method A instead of Method B?

Method A is simpler to apply and is appropriate for most standard additional payment scenarios. Method B is more complex but produces a withholding amount that more closely approximates the actual tax payable. Both methods are accepted by the ATO, the choice generally comes down to the complexity of the payment and the level of precision required.

Does Method A apply to all bonus and commission payments?

Method A applies to additional payments that relate to more than one pay period or an undefined period. It should not be used for payments that relate to a single pay period, for those, the standard withholding calculation for that pay period applies.

What if my Method A calculation produces a negative result?

If your calculation using either method results in a negative amount, treat the result as nil.

Is Method A the same as Schedule 5?

Schedule 5 is the ATO's tax table for back payments, commissions, bonuses, and similar payments. Method A is one of the two calculation methods outlined within Schedule 5. The other is Method B(ii).

Best Practices for Method A

• Use payroll software: Manual Method A calculations involve multiple steps and are prone to error. Payroll software that applies the formula automatically significantly reduces compliance risk.
• Check payment type: Confirm whether the additional payment relates to more than one pay period before applying Method A — it is not appropriate for single pay period payments.
• Consider Method B for higher earners: For employees with higher incomes or HELP debts, Method B(ii) may produce a more accurate withholding result and reduce the likelihood of an end-of-year tax shortfall.