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Payroll News - 2005

Payroll News Issue 77 August 2005

In this issue we tell you about your employer responsibilities when you change your business structure. We also cover how to treat an employee receiving both wages and withholding payments.

If you have an employer topic you'd like to see covered in this newsletter, please write to the Editor, Payroll News, PO Box 2198, Wellington or email us at payroll.news@ird.govt.nz and we'll aim to cover the topic in a future edition.

Please pass this newsletter on to the person who deals with the payroll in your business.

Your responsibilities if you change your business

We have come across a few cases where some of you have changed your business structure but have not fulfilled your employer obligations under your old business entity. This generally happens if you change from being a sole trader to a partnership or a company. Sometimes, this change is also accompanied by a change in your business activity.

If you have already changed or intend to change your business structure in future, make sure you:

  • call us on 0800 377 772 and tell us that you are no longer employing under your old business entity. Alternatively, you can send us a completed Business cessation   (IR 315) form and we will then update our records and stop sending you employer monthly schedules (EMS)
  • file your last EMS for the old business entity and remember to show cease/end dates for all employees.

Note
Simply putting the end dates for employees on your old business's EMS does not cease your employer obligations. You need to call or send us a completed IR315.

Employees who receive wages and withholding payments

If you have someone working for you as an employee as well as a contractor, you need to show their details twice on your employer monthly schedule (EMS). One line will show their employee details (name, tax code, gross earnings, PAYE deducted) and child support and student loan deductions, (if applicable). The other line will show their contractor details, their name, tax code "WT", withholding payments and withholding tax deducted. Remember to complete the start and finish date boxes when required.

PAYE calculator for holiday pay

We have been asked why our online holiday pay calculator does not give the option to calculate PAYE on four weeks annual holiday pay. This is because the Holiday Act 2003 currently entitles employees to a minimum of three weeks annual holidays.

The minimum annual leave entitlement for all employees will increase to four weeks from 1 April 2007, when our online holiday pay calculator will be updated to include the PAYE calculations of four weeks annual holiday pay.

If you need assistance with employees' holiday entitlements, please call the Department of Labour's Employment Relations Infoline on  0800 800 863 or go to their website www.ers.dol.govt.nz

Note
If you are calculating holiday pay at 6% of the gross salary, please make sure you select the correct paying frequency, ie weekly, fortnightly, four-weekly or monthly, in our online holiday pay tax calculator. Using the wrong paying frequency will result in incorrect PAYE deductions.

Have you registered for an Online services account and changed your first-time password?

Before you can use the "File an employer schedule (ir-File)" service to file your employer monthly schedule electronically, you will need to register for an Online services account.  Once you have registered, a confirmation letter will be sent to the postal address we currently hold for you. The letter provides you with a password to be used with the UserID you chose during registration.

We will soon be introducing a time limit on first-time passwords and userIDs. First-time passwords and userIDs that have not been used within ninety days of registration will be cancelled.

If you have not already done so please log in using your first time password in combination with the userID you entered  when registering. To login to Online services go to our website www.ird.govt.nz and click on Login. You will be prompted to change your password when you first log on to the service.

Once you have changed your first-time password, no other time restriction for use of your Online services account will apply.

Lump sum payments

Lump sum payments include payments you make to your employees for annual or special bonuses, retiring allowances, redundancy payments, gratuities or backpay.

There  are three tax rates for lump sums-22.2 cents, 34.2 cents and 40.2 cents in the dollar (which include ACC earners' levy). Retiring allowances and redundancy payments are not liable for ACC levy so the rates for these are 21 cents, 33 cents and 39 cents in the dollar.

The rate you use will apply as follows:

  • 22.2 cents in the dollar

when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is $38,000 or less

  • 34.2 cents in the dollar

when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is $38,001 to $60,000

  • 40.2 cents in the dollar

when the combined total of the lump sum payment and the grossed-up annual value of the employee's income for the previous four weeks is greater than $60,000.

Example
You're going to pay a bonus payment of $10,000 and the employee's earnings for the last four weeks are $3,000.

Last four weeks' income    $ 3,000
Multiply by 13 to get 52 weeks income  
x 13 $39,000
Add bonus payment     $10,000
Total income for full year $49,000


The employee's total income for the year (including the bonus payment) is between $38,001 and $60,000 so the bonus payment must be taxed at 34.2%. If the payment was a redundancy payment it would be taxed at 33% because no earner levy is payable.

If your employee has a student loan and uses an M SL, S SL, SH SL, or ST SL tax code, you will also have to deduct student loan repayments from lump sum payments.

Example

Redundancy payment subject to student loan deduction   $12,000
PAYE at 33 cents in the dollar $ 3,960
Student loan deduction at 10 cents in the dollar $ 1,200
Total deduction $ 5,160


Your employees can also have any lump sum taxed at a higher rate if, for example, they have another job or other untaxed income, such as rent.

Note
If the lump sum is taxed using the lower rate (22.2 cents in the dollar), tick the circle "Lump sum payment taxed at the lowest rate" on the Employer monthly schedule (IR348) to show this.

No-declaration rates

Remember, if an employee does not provide a fully completed and signed Tax code declaration (IR 330) showing their name, IRD number and tax code, you must deduct PAYE at the no-declaration rate and enter the tax code "ND" on your employer monthly schedule (EMS). The rate of deduction is either 46.2 cents in the dollar (including ACC earners' levy) for employees, or 15 cents in the dollar on top of the normal withholding tax rate for self-employed contractors.

If you send us an EMS which has an employee IRD number that is not valid in our system, the following monthly schedule we send you will have that employee's name printed on it, but the IRD number box will be blank.

You will need to tax your employees at the no-declaration rate until they have given you the correct IRD number.

Thank you - from Child Support

A lot of families depend on you to deduct child support payments from parents' salaries or wages so that we can pass on the payments.

We recognise that there may sometimes be complexities involved and we appreciate how you assist with the collection of child support. In the last year you helped us to collect nearly $184 million through deductions from employees' wages.

We are committed to work with you to help make the collection of child support payments easier. If you would like to speak with our staff or arrange an advisory visit, please contact us on 0800 220 222 and we will arrange to visit you and go over any questions you may have about the child support deduction process.

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Date published: 29 Jul 2005

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