How to run payroll for staff in New Zealand
Bringing on an employee is a big step in the life of a business. It represents growth and new skills coming into the fold. With over half a million small-medium businesses in New Zealand, there’s a huge amount of pay runs being processed each week. If you’re new to the world of paying employees, it can feel a bit daunting getting your head around the tax obligations and admin.
There’s no reason to worry, however, as there is help you can access to get payroll done properly, as well as platforms that help keep things organised. In this guide, we’ll provide an overview of payroll and what it means to process this regularly. If you’ve still got some questions (which is completely normal) - get in touch with our team who can talk through your requirements. Part of our service is to take the payroll duties completely off our clients’ plates - allowing them more time to run their business and focus on the things they’re both good at and interested in.
With that said, let’s dive right in!
Are you registered as an employer with the IRD
The first step that must be completed prior to processing any payroll is to regester your business as an employer with the IRD. This can be completed here: Register as an employer (ird.govt.nz)
To complete this process you’ll need:
- the IRD number to be registered
- your contact details (contact phone number and address)
- bank account details
- your BIC (business industry classification) code
- the date you start employing staff.
Ensure you’ve got all employee details and pay amounts confirmed
Before any pay runs can be processed, you’ve got to make sure that your employees’ details are entered correctly into your database and payroll system. Mistakes with pay aren’t just a big hassle for you to correct, but they can leave employees feeling less trustful that their pay is going to be right. Some employees find discussions about pay quite difficult, so it’s incumbent on employers that they’re accurate and on time.
It’s important to check the details you have annually to ensure that nothing has changed such as employee/s rate/s of pay, tax codes etc. This step only takes a minute or two to do but can save a lot of hassle in the long run.
Employee details that you’ll want to capture and use for processing payroll usually include:
- their full legal name.
- their address.
- their IRD number.
- their bank account for depositing net pay into.
- their tax code to ensure the right deductions are made.
- the KiwiSaver contribution % they’ve opted for.
- the amount of pay due.
- the pay rate (based on salary or per/hour wages).
- how many hours were worked.
- annual leave entitlement accrued.
- the date range the pay pertains to.
You can find out more information to include on a payslip on the government’s employment website.
Understand your obligations with paying employees
The employment contract you have with someone is important to understand properly, to ensure the pay is accurate. It’s a good idea to read through your employment responsibilities. The most important element of a pay run is to get it processed on time and at the right amount. The details of the employment contract are valuable as reference back to later when processing the first payroll. As details are loaded into your system, subsequent runs won’t be as complex, unless they require payment out of annual leave entitlement as part of their pay.
How you calculate pay for a salaried employee vs. wage employee will determine how you calculate the pay run. Wages typically require accurate time sheeting to ensure the hours worked are paid for. Salaried employees may have a clause in their contract that necessitates ‘overtime’ to be paid additional to the standard hours outlined.
Find good payroll software
At the centre of any efficient payroll function in a business is the software it uses to manage the payroll. You will have a number of options to pick from, with many NZ-based payroll providers offering excellent functionality and user experience.
Typically payroll platforms will fall into two categories; the first is payroll features that are part of a bigger accounting and financial management system. The second is a standalone payroll system that plugs into the main accounting software on the market. This latter option is a popular choice as you’re able to choose the specific platform that suits your needs without it being totally separate from the main business accounting records.
If you’re unsure about what direction to go in with regards to software, our team can help provide you with expert guidance.
Determine Kiwisaver deduction
The pay run for your employee needs to reflect what’s in their contract - the standard contribution amounts for employees start at 3% and go up to 10%. Employees can adjust their contribution rate once every 3 months unless you as the employer agree to changing it sooner. As the employer you have to make contributions to KiwiSaver for your employee on top of their gross pay - you can read more about this on IRD’s dedicated page about Employer contributions. Your system should have a field for entering in contributions.
Note: Kiwisaver contributions from the employer can be included in the employees pay rate/ salary. This needs to be specified in their employment contract and gone over with the employee.
Determine PAYE tax component
Your employees are liable to pay the earners’ levy for ACC cover - a flat rate that all PAYE employees pay. This comes out of their PAYE deductions. As the employer you’ll be liable to pay employees ACC cover based on a specific classification unit relating to the industry you work in. Depending on the level of risk and claims history for that industry you’ll pay a higher or lower rate per $100 of employee earnings.
The main PAYE element is the income tax itself - pay as you earn or PAYE is designed to keep employees up to date with their tax obligations as they earn, instead of paying in lump sum amounts.
The tax code of your employee is important to ensure the right amount is deducted by your payroll system and reflected in your payday filing.
The other key element to calculating PAYE deductions is the employee's gross earnings across the year. They’ll need to be paying tax at different rates based on their total income. These are often referred to as tax brackets. You can learn more about what these different ranges of income are taxed at on IRD’s website.
It’s really important to make sure your employees are being taxed appropriately - the last thing anyone wants is you or your employee being hit with extra tax to pay at the end of the tax year. It’s these sorts of matters that often benefit from having a qualified accountant and payroll specialist helping you manage this.
Make deductions as required (e.g. student loan)
If your employee has a tax code that requires additional deductions such as a student loan repayment, your pay run will need to reflect this. Your employee is ultimately responsible for ensuring they’re making payments towards things like student loans, so speak to them about this during the employee agreement process.
Process net payment to employees
After the right calculations and deductions have been made, your payroll system can proceed with processing payroll. Ideally, you’ll have a system that can process the payments by connecting with your bank accounts, otherwise, this will need to be processed separately in your bank account.
Annual leave calculations
As your employees work with your business, they’ll be accruing annual leave - typically 4 weeks a year. Your payroll system should calculate this as part of its functionality - you’ll just need to ensure that the details around when your employee started is accurately recorded in the system.
Annual leave calculations need to be calculated at the higher amount of either the Average Weekly Earnings (AWE) or the Ordinary Weekly Pay (OWP). Depending on payroll system, this may need to checked/calculated manually to make sure it is correct.
Capture records of payroll and store
Make sure that records of payroll are kept locally and on the cloud in your platform. IRD now requires businesses to file each time they pay employees (known as payday filing), so there’ll be records kept there too.
Send reporting to IRD
Inland Revenue requires on time payday filing to ensure that employee records are kept up to date and deductions are accurate. This part of paying employees has come into effect from 2018, and has certainly introduced new work to a business’ operations. It’s another reason why it may in fact be more efficient to partner with a trustworthy bookkeeping and filing partner like RightWay to remove this from your long list of jobs!
The empolyee needs to make sure the PAYE has been paid to the IRD monthly. Some payroll systems do this automatically, but others don’t, so a direct payment to the IRD is needed. It’s a good idea to check the amount to make sure it’s correct with the payroll system too.
Managing business finances to keep payroll on time
Making payroll is simply a must of any healthy business. As a business owner, you’ll need to be paying your staff before yourself - but there shouldn’t be that situation of having to decide in the first place with some careful planning. In order to not be squeezed by your payroll obligations, it pays to optimise other parts of the business including keeping accounts receivable timeframes short, reducing unnecessary overheads and continually finding ways to grow your margins.
Hiring employees should unlock new potential for your business and your income, so the numbers need to make sense in order to justify that hire. At RightWay, our business partners help to guide businesses through these different phases, ensuring they’re well-prepared to bring someone on and benefit from it in the process.
When there’s a mistake - what to do
If you’ve made a mistake with payroll - don’t panic. The first thing to do is confirm what the issue is and exactly by how much the pay is out. It’s important not to rush amending an apparent error under stress. Sometimes it may seem as though there was an error, but certain deductions or thresholds were met that created a difference in typical pay.
Once it’s confirmed, you can proceed with making the right payment and filing this appropriately. If you’re concerned about records being incorrect, you can work with your accountant or IRD to update these as needed.
If this is a scenario that you’re currently experiencing, don’t hesitate to give us a call on 0800 555 024, email at email@example.com or fill out our contact form.
Engaging a partner to manage your payroll - the benefits for many businesses
As you might have ascertained from this article - payroll has a lot of small elements that need to be thought about to ensure accurate on time processing. As many business owners have barely the time in the day to run their business and do the job, it makes sense to tap into expert bookkeeping, accounting and business advice resources who can essentially act as this function for your business. RightWay is made up of bookkeepers, business advisors and chartered accountants, we help many clients each day navigate their payroll. We’re also an HR services provider, so if you want to bring your entire employee onboarding process across to us, we can help there too.
Further reading on the topic
Here are some other useful resources from around the web:
The above information is general and does not represent tailored advice to your business. For more specific guidance, get in touch with our team who can connect you with one of our bookkeeping experts.
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