Schedule 5 tax table

Schedule 5 is the ATO's tax table for calculating Pay As You Go (PAYG) withholding on back payments, commissions, bonuses, and similar additional payments made to employees. It is used when a back payment of salary or wages is made as a lump sum payment in arrears, and provides two methods of tax calculation.

The effect of the calculation is to enable tax to be withheld at a rate that approximates the appropriate amount of tax which would apply on an annual tax return basis. Its full ATO reference name is Schedule 5, Tax Table for Back Payments, Commissions, Bonuses and Similar Payments (NAT 3348).

Standard PAYG withholding tax tables are designed for regular, recurring wage and salary payments. Schedule 5 exists because additional payments that span more than one pay period need to be treated differently, withholding the tax as if the payment had been spread across the relevant period, rather than taxing it entirely as income in the pay period it was received. Without Schedule 5, a one-off bonus or back payment could trigger a disproportionately high withholding rate, leaving employees over-withheld during the pay period and requiring adjustment at tax time.

What payments does Schedule 5 apply to?

Schedule 5 applies to any additional payments, including commissions, bonuses, or similar payments, that don't relate to a single pay period, regardless of the financial year the additional payment applies to. Common examples include:

• Annual or performance bonuses
• Commission payments covering multiple pay periods
• Back payments of salary or wages following a pay rise or award increase
• Lump sum leave loading payments
• Allowances paid in arrears

If a commission, bonus, or similar payment relates to work performed in a single pay period, for example, a week, a fortnight, or a month, the amount is added to all other earnings for the current period and withholding is calculated using the regular PAYG withholding tax table. Schedule 5 is only required when the payment spans more than one period or relates to an undefined period.

The Role of Schedule 5 in Payroll

• For employers: Schedule 5 provides the approved framework for calculating PAYG withholding on additional payments correctly and in compliance with ATO requirements. Using the wrong withholding method, or applying standard tax table rates to a bonus or back payment, can result in incorrect withholding and STP reporting errors.
• For employees: Schedule 5 ensures that additional payments like bonuses and back pay are not overtaxed in the pay period they are received. By spreading the withholding calculation across the relevant pay periods, the amount withheld more closely reflects the employee's actual annual tax liability.

The Two Methods Within Schedule 5

Schedule 5 provides two ATO-approved calculation methods:

• Method A is the simpler of the two. It apportions the additional payment across the number of pay periods in the financial year and applies that average to the employee's gross earnings in the current pay period. It is suitable for most standard bonus and commission payment scenarios.
• Method B(ii) is more involved but produces a withholding result that more closely approximates the employee's actual tax payable. Both methods are acceptable to use when working out the withholding amount. Method B(ii) is generally preferred for higher-income employees, employees with HELP or other study and training support loan debts, or situations where greater precision is required.

If a back payment applies to both the current and previous financial years, the payment should be apportioned between those years and the applicable method used for each component to calculate withholding separately.

How Microkeeper Handles Schedule 5

Microkeeper supports Schedule 5 withholding in two ways.

• For Microkeeper customers: the payroll platform includes a built-in feature that allows payroll managers to select the Schedule 5 tax method, Method A or Method B(ii), for individual payment lines on a payslip, such as commissions, bonuses, or back payments. This means the correct Schedule 5 withholding is calculated and applied at the line level within the pay run, without requiring a separate manual calculation.
• For anyone wanting to calculate or verify Schedule 5 withholding: Microkeeper's free online Method A and B(ii) calculator is available at microkeeper.com.au. The calculator supports both methods, works through the full calculation, and is available to anyone, no Microkeeper account required.

FAQs about Schedule 5

When do I need to use Schedule 5?

Schedule 5 applies whenever you make an additional payment to an employee that relates to more than one pay period, such as a bonus, commission, or back payment of salary. If the payment relates only to the current pay period, it is added to the employee's regular earnings and the standard withholding tax table applies instead.

What is the difference between Method A and Method B(ii) under Schedule 5?

Both are ATO-approved methods for calculating Schedule 5 withholding. Method A is simpler and suitable for most scenarios. Method B(ii) is more precise and is recommended when greater accuracy is needed, particularly for higher-income employees or those with study and training support loan debts. Both methods are accepted by the ATO.

Can I use Microkeeper's calculator to work out Schedule 5 withholding?

Yes. Microkeeper's online tax calculator supports both Method A and Method B(ii) under Schedule 5, allowing payroll managers to calculate the correct withholding amount before processing a pay run.

Does Schedule 5 apply to termination payments?

No. Termination payments are covered by separate ATO schedules. Schedule 7 applies to unused leave payments on termination of employment, and Schedule 11 applies to employment termination payments (ETPs). Schedule 5 applies specifically to back payments, commissions, bonuses, and similar payments made during the course of employment.

What happens if my Schedule 5 calculation produces a negative result?

If your withholding calculation under either Method A or Method B(ii) produces a negative result, treat the amount as nil. Do not apply a negative withholding figure.

Do study and training support loan debts affect Schedule 5 calculations?

Yes. If an employee has advised you they have a HELP, VSL, Financial Supplement, SSL, or AASL debt, you must also withhold from the additional payment using the relevant study and training support loans tax tables, using the same method applied for the PAYG withholding calculation.

Best Practices for Schedule 5

• Identify the payment type early: Before processing any bonus, commission, or back payment, confirm whether it relates to more than one pay period. This determines whether Schedule 5 applies or whether the standard tax table should be used instead.
• Choose the right method for the employee: For most straightforward payments, Method A is sufficient. For higher-income employees or those with loan debts, consider Method B(ii) for a more accurate withholding result.
• Use purpose-built tools: Schedule 5 calculations involve multiple steps and are error-prone when done manually. Use payroll software or a dedicated calculator — such as Microkeeper's online Method A and Method B(ii) calculator, to ensure the correct withholding amount is applied.
• Keep records: Maintain clear records of the Schedule 5 method used for each additional payment, the pay periods the payment relates to, and the withholding amount calculated. This supports accurate STP reporting and simplifies end-of-year reconciliation.