In Short
- PAYE requires employers to deduct income tax and ACC levies from employees’ wages and pay them to the IRD.
- Employers must file payroll details after each payday and pay PAYE monthly or twice a month, depending on payroll size.
- Accurate and timely compliance is crucial to avoid penalties.
Tips for Businesses
Ensure you use reliable payroll software to manage PAYE efficiently. Familiarise yourself with IRD deadlines and regulations, and keep clear records of all deductions. Regularly review your PAYE process to ensure compliance and prevent penalties.
As your business grows, you will need to consider hiring staff to help you manage day-to-day activities. However, before you start recruiting, it is a good idea to understand your employment obligations under New Zealand law. For example, you must deduct income tax from wages if you plan to hire employees. These deductions will then need to be paid to the Inland Revenue Department (IRD) within a certain period. This article will help you understand your Pay As You Earn (PAYE) obligations as an employer.
What is PAYE?
PAYE is a system for paying income tax and Accident Compensation Corporation (ACC) earner’s levy on your employees’ behalf. When you employ staff, you need to:
- deduct PAYE from their wages, salary or schedular payments;
- pay it to the IRD by the due dates; and
- file your employees’ pay details.
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How to Calculate PAYE
To determine how much to deduct from your employees, you will need to know your their:
- tax code; and
- details of their salary or wage for the pay period.
As part of their onboarding process, your employee should complete their tax code declaration (IR330) and give it to you. If you hire contractors, you may need to deduct tax from them if they are on schedular payments. There are some cases where they are exempt from this. In addition, the contractor needs to provide you with their tax rate notification for contractors (IR330C).
You can use the IRD’s PAYE tables or PAYE/KiwiSaver deductions calculator to determine how much tax to deduct. This calculator is useful for weekly, fortnightly, four-weekly or monthly pay cycles. However, it does not allow for extra pay like redundancy, special bonuses, or schedular payments. If you pay out holiday pay at 8% of annual earnings, you can use the IRD’s tax on holiday pay calculator.
PAYE includes an ACC earner’s levy component. This levy is a flat rate of $1.60 per $100 of liable income as of 1 April 2024 until 31 March 2025.
Continue reading this article below the formHow to File PAYE
Each pay period you need to send the IRD your employees’ pay details in addition to calculating and deducting PAYE. You can file these by using:
- the IRD’s myIR online service;
- your own accounting software; or
- paper forms (if you meet specific criteria).
When you file your employment information form, you must include your employees’ payday and pay period. You can enter their pay period in myIR using the on-screen method or in your payroll software. If an employee does not appear in myIR when filing your employment information, you must add them as a new employee.
You can correct any mistakes:
- using myIR or your accounting software; or
- by paper or by phone.
You will also need to let the IRD know if you will not be paying wages for a month or more or if you employ staff irregularly during the year.
Consequences of Incorrect PAYE Deductions
Incorrect PAYE deductions can lead to significant consequences for you. If too little tax is deducted, you may be liable for paying the shortfall, along with penalties and interest charged by the IRD. Overpayments may result in complications for the employee, who could receive a refund later but may face temporary financial difficulties. Late filings or incorrect submissions can also incur penalties, and in severe cases of non-compliance, further enforcement actions may be taken by the IRD, damaging the business’s financial standing and reputation. Ensuring PAYE calculations are accurate and timely to avoid these issues is crucial.
How to Pay PAYE
You have to pay PAYE deductions to the IRD once or twice a month, depending on your gross annual PAYE and employer superannuation contribution tax (ESCT). Paying these deductions is independent of how often you file your employees’ information.
These requirements may change with government regulations, so always check the employer’s section of the IRD website.
In the instance of late payments, the IRD will send you a reminder. In some cases, they may charge you interest. For non-payment or late payments, further penalties may apply. If you do not pay wages within a certain period, you should inform the IRD. That way, they will not charge you late filing fees unnecessarily.
Other Pay Deductions
It is important to consider that you are responsible for other employee wage deductions. In addition to PAYE, you will also need to deduct the following:
- child support;
- KiwiSaver;
- payroll giving;
- student loan repayments; or
- superannuation cash contribution tax.
Key Takeaways
Many small business owners contract out or employ someone to do their payroll, especially once a few employees are on board. However, managing PAYE can be straightforward if you set things up correctly. As an employer, you must:
- calculate and deduct PAYE income tax from your employees’ salaries wages or schedular payments; and
- pay PAYE to the IRD once or twice a month.
If you need help understanding your PAYE tax obligations or registering as an employer with the IRD, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
PAYE is a method of paying income tax to the IRD on your employees’ behalf. As an employer, you are responsible for calculating and deducting PAYE from your employee’s wages, salary or schedular payments, and paying it to IRD once or twice a month.
The PAYE tax rates depend on your employees’ tax codes. In addition, there is a secondary component to account for ACC earner’s levy, which is a compulsory contribution on the part of an employee to cover the cost of non-work injuries. The IRD collects this levy on behalf of ACC. You can use the PAYE tables or calculator available on the IRD website to determine how much to deduct.
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