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Employer responsibilities

Taxing holiday pay

Definition

Holiday pay is both pay for an employee's annual leave and pay for statutory holidays.

How to tax holiday pay

Holiday pay and pay for statutory holidays are included as earnings in the period that you actually pay them to your employees.

The Commissioner's operational position on calculating PAYE on holiday pay, sets out the two methods for calculating PAYE on holiday pay.

The PAYE calculator can be used to work out the amounts to deduct for PAYE, student loan repayments and KiwiSaver deductions, as well as any KiwiSaver employer contribution amounts and the ESCT to be deducted that you are required to pay, where one of the following situations applies:

  • the holiday pay is paid instead of the employee's regular pay when the employee takes annual leave, or
  • the holiday pay is paid as part of an employee's regular pay at the rate of 8% of the employee's gross earnings.

In other situations where the holiday pay is paid as a lump sum in addition to the employee's regular pay in a pay period, the holiday pay will be taxed as an extra pay. these situations include:

  • where the holiday pay is paid as a lump sum before the holiday is taken (holiday pay paid in advance)
  • where the remaining balance of the employee's leave entitlement is paid as a lump sum at the end of their employment.

Find out more about calculating PAYE on extra pays in the Employer's guide (IR335).

From 1 April 2011, employers and employees can agree to cash in a maximum of one week of annual holidays. If an employee has "cashed in" any annual leave this is treated as an extra pay.

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