Inland Revenue has issued a handy guide for first-time employers. This is more aimed at businesses thinking about being an employer and gives you an idea of what’s involved.
There is another (longer) guide from Inland Revenue, which deals more with the legal aspect of being an employer.
We strongly suggest you read at least the First-time Employer Guide, but we’ve set out responses to the most common questions we receive.
▶ How does PAYE work?
▶ When should I register as an employer?
▶ How do I register as an employer?
▶ How to pay
▶ Reference to use when paying Inland Revenue
▶ Recording the payments when using Xero Payroll
▶ Recording the payments not using Xero Payroll
▶ Common payroll systems
Pay As You Earn (PAYE) is a tax charged on employees’ wages and salaries.
As a business, you’re acting as one of the governments agents by paying PAYE to Inland Revenue on behalf of your employees.
At the end of each wage period (weekly, fortnightly, or monthly), you have ten working days to complete and file your Employment Information form with Inland Revenue. This is called Payday Filing. Your payroll system will keep a record of your employees’ general information and calculate gross and net wages based on the information inputted. With the click of a button, will send the information electronically to Inland Revenue.
At the end of each month, your payroll system will show PAYE* deductions – this must be paid by the 20th of the next month.
So – just to clarify:
- You file the Employment Information with Inland Revenue each pay period
- You pay Inland Revenue each month
* For the purposes of this article, PAYE includes Kiwisaver (for employer and employee), Employer Superannuation Contribution Tax, and Student Loan deductions.
You must register as an employer as soon as you start employing people. You can register in advance if you know the person will become an employee.
Inland Revenue makes this really easy for you and has a step-by-step guide here.
Head into your myIR page and at the top right of the page you’ll see ‘I want to…’ Click on ‘More’ and then on ‘Register for new tax accounts’. Follow the instructions and submit your registration.
You’ll pay the net wages to your employees as calculated by your payroll system. In fact, many payroll systems will actually do this for you, saving you having to log in to your bank account to pay. This is another way of eliminating human error.
As with other payments to Inland Revenue, you can pay PAYE using:
- Internet banking
- Debit card*
- Credit card*
- Direct debit
- Your payroll system (yes, it may do this as well!)
Details to include in your payment
- IRD number – if you have an 8-digit IRD number, put a 0 at the beginning
- Tax account and period (DDMMYYYY) – for example:
- EMP 31042021
- INC 07052021
- GST 30062021
* Inland Revenue charges a ‘convenience fee’ of 1.42% for using debit or credit cards.
When paying PAYE, the tax type is EMP. This tax type covers:
- Child support
- Student loan
- Employer Superannuation Contribution Tax (ESCT)
You don’t need to pay these amounts separately. JUST MAKE ONE PAYMENT. Inland Revenue will allocate your payment to the relevant sub-sections based on your payday filing records.
Your accounting system should include separate account codes for wage expense, wages payable, and PAYE payable. If you’re using Xero with Xero Payroll, this is where the transactions will be recorded.
Xero Payroll will suggest account codes for you, but you can easily change them to suit your reporting preferences.
Once you’ve entered the payrun information, Xero will do the following:
- Tell you the net amount each employee will receive, and how much PAYE should be paid to Inland Revenue.
- Allocate the gross amount as a wage expense in the profit and loss account
- Until they are paid, wages and PAYE will be shown as separate liabilities in the balance sheet
When making payments, this is what you do:
- When you pay the wages to your employees, you should code the transactions to the wage liability
- When you pay PAYE to Inland Revenue, this should be reconciled against the PAYE liability
Why don’t I code my payments (from the bank account) to the wage expense?
Xero has already done this for you. It automatically codes the gross wages to the wage expense. It recognises that the expense has been incurred (profit and loss account) and the amount you still owe (wage liability and PAYE liability). If you reconcile the bank transactions to the wage expense, it’s a double up.
First, make sure your accounting system has an account code for the wage expense.
- Your payments to employees should be recorded as a wage expense
- Payments to Inland Revenue are also recorded as a wage expense
When adding the two payments together, you arrive at the gross wages – this is your wage expense in the profit and loss account.
Listed below are some well-known payroll systems, which allows you to include start dates, minimum wage requirements, annual leave accruals, and many automatic calculations.
What to look for
Just note that you’ll always be able to upgrade, so your payroll system just needs to meet your current requirements.
- Number of employees – most payroll systems have different prices for (say) 1-5 employees, 5-10 employees, etc
- Price – of course (see above)
- Integration with your accounting system – you can often link payroll to your accounting system, eliminating the human error element
- Ease of use
- Ability to link to Inland Revenue
- Integration to your business bank account – can you make the payment directly from the software?
- Access for employees – are they allowed to view or change their own information online? Would it be useful for employees to use the payroll system to enter timesheets, claim expenses and kilometre reimbursement, and apply for annual leave?
- Your requirement for other features
- Employee allowances
- Expense claims
We STRONGLY recommend using an electronic payroll system or provider to process and keep payroll records, and to file returns with Inland Revenue. Payroll is complicated and areas such as annual leave, payslips and legal compliance require a lot of specialist knowledge. Payroll systems are reasonably priced (or even free for some charities), accurate, and keep the information that you need safely in one place.
Still unsure on whether you should register as an employer? We’d love to help. Give us a shout at [email protected] or 0800 755 333.