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Employer obligations – Who is an employer and deductions
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Welcome to an introduction to employer obligations, who’s an employer, and deductions.
This is part one of our series.
It’s important to know who must register as an employer, and the deductions employers must make.
Feel free to pause, or review as you need to.
We'll talk about
- Who is an employer?
- Employer responsibilities
We will look at who needs to register as an employer, what your employer obligations are, and the deductions that employers make.
Are you an Employer?
- An employer is anyone who hires someone to work for their business or organisation as an employee or contractor.
- IR336 questionnaire
Self-employed or employee?
- IR330C form
Contractors that must have tax deducted.
Employers are businesses that engage someone to work in their business.
It’s up to the employer to understand who’s an employee, and who’s an independent contractor.
Anyone that works for you, where you have control over what, where, and how the work is performed, could be an employee.
If you’re unsure, we have a questionnaire on our website which will help you work this out.
It’s an IR336.
If you hire a self-employed contractor, you may still need to deduct tax from their payments.
There’s a list of contractors that must have their schedular tax deducted from their income.
It’s found on our website, and on our IR330C form.
You’ll need to:
- Make deductions from salaries, wages and schedular payments to contractors
- Keep wage records and pay PAYE and ACC
- Understand your obligations regarding KiwiSaver
- File employment information for each pay day
One of the key responsibilities for employers is to make deductions from wages, and from schedular payments made to contractors.
You must keep wage records and budget for PAYE, and ACC.
You’ll also need to ensure your employees complete their tax code form, and any KiwiSaver forms, if they’re eligible.
Employers must also file employment information returns on a pay day basis.
There are a variety of deductions which Inland Revenue may require you to deduct from employees, or which employees may choose to have deducted.
- PAYE/schedular tax
- Student loans
- Child support
- Payroll giving
Here are the types of deductions you’ll need to deduct from wage payments.
We’ll cover most of these in more detail in the following slides.
There may also be times when we request you make additional deductions from an employee’s income.
For example, to cover their arrears.
If this is the case, we’ll send you a letter with the details.
PAYE and schedular tax
- Deduct tax from employee’s salary or wages
- Employee Tax code declaration
- Deduct tax from schedular payments to contractors
- Contractor Tax rate notification
Employers must deduct tax from salaries, wages, and schedular payments to contractors.
Employees must complete a tax code declaration form, with their IRD number, and tax code, and give it to their employer.
Employers hold onto the IR330, and use the information provided to work out how much tax to deduct.
If you hire a contractor that receives schedular payments, you’ll deduct, schedular tax.
The list of businesses that receive schedular payments is on the IR330C form.
If the contractor’s activity isn’t on the list, then you don’t need to deduct any tax.
If the activity is on the list, the contractor must complete the IR330C form, and give it to you.
You keep this form with your records.
Schedular payments are taxed at a flat tax rate, and the IR330C, tells you which tax rate applies.
If a contractor holds a current certificate of exemption, you won’t need to deduct any tax.
They must show you the exemption, and you’ll need to take a copy.
- Automatic enrolment criteria
NZ resident, aged 18 - 65yrs
- Opt-out process, weeks 2 – 8
- Employee contributions
3%, 4%, 6%, 8%, 10%
- Employer contributions
It’s important to know your KiwiSaver responsibilities as an employer.
When a new employee starts, you’ll need to check if they meet the automatic enrolment criteria.
Generally, if you’re a New Zealand resident and aged between 18 and 65, you must be enrolled into KiwiSaver.
The full criteria is on our website.
If an employee must be enrolled, you’ll need to give them the KS2 enrolment form and start KiwiSaver deductions from their first pay.
The employee can only opt-out of KiwiSaver between week 2, and week 8 of employment.
If they want to opt-out, they need to complete a KS10 forml and give it to you.
You hold on to all of these forms in your records.
KiwiSaver members choose to contribute between 3 percent, and 10 percent of their income to their KiwiSaver fund.
Employers must contribute 3 percent to the employees fund.
You can choose to contribute more if you want to.
Employers contributions have tax deducted.
The tax is called, ESCT, employer superannuation contribution tax.
Note, that you don’t make KiwiSaver contributions for payments to contractors.
Employer Superannuation Contribution Tax
A tax deducted from your cash contributions to employee KiwiSaver schemes, complying funds and other superannuation funds.
You’ll need to deduct ESCT at either:
- The rate determined by adding the employees income to the employers KiwiSaver contributions
- If your employee agrees, you can add your employer contributions to your employees salary or wages and deduct PAYE form the total
Employers need to work out how much tax, or ESCT, to deduct form your employer KiwiSaver contributions.
The rate depends on the employee’s gross salary and wages for the year, plus the total employer contributions.
If the employee hasn’t been with you for a year, our website has details on how to work out the ESCT rate.
Search, ESCT, to find the information.
We also have a separate YouTube video, specifically on ESCT that you might want to watch.
The other option for deducting tax on employer contributions, is to add your contributions to the employee’s wage, and deduct PAYE.
This can only be done if the employee agrees.
|ESCT rate threshold amount|
|$0 to $16,800||10.5%|
|$16,801 to $57,600||17.5%|
|$57,601 to $84,000||30%|
Here are the different ESCT rates and thresholds.
Work out the ESCT rate based on the total wages, plus employer contributions for the year.
For example, if an employee earns 40 thousand dollars per year, and the employer KiwiSaver contributions are 1 thousand 2 hundred, then the combined total is 41 thousand 2 hundred, and the ESCT rate will be 17.5 percent.
Once you’ve worked out the ESCT rate, you’ll enter this into the PAYE calculator.
The calculator will tell you how much ESCT to deduct from the pay.
The ESCT rate stays fixed for the year, regardless of any change in salary or wages.
- Employees with a student loan must add ‘SL’ to their tax code
- Deduct repayments from the employees’ salary or wages
- There are special situations where a different student loan deduction may apply
If you have an employee with a student loan, deductions are made form their salary and wages to repay it.
The employee will add, SL, to their tax code.
When you use these details in the PAYE calculator, it’ll tell you much the student loan deductions are for that pay.
In some situations the usual deduction rate might not apply.
Your employee might’ve given you a certificate with a specific deduction rate, or even an exemption from deductions.
Follow the rate on the letter for the period of time specified.
At the end of the certificate period, you’ll go back to the usual deduction rate, unless the employee provides a new certificate.
You might also receive a notice direct from Inland Revenue for student loan deductions.
If you do, you must follow the requirements of the letter.
If the employee disagrees, they’ll need to contact Inland Revenue.
Tax relief - COVID-19 Coronavirus
- If you've been affected by the downturn in business due to COVID-19 coronavirus, we have a range of ways to help.
- Talk to your tax agent, visit ird.govt.nz/covid19, or phone 0800 473 566 for more information.
Go to ird.govt.nz/covid19 for more information.
The Government has introduced a number of ways to support businesses that have been impacted by COVID-19.
This includes options with respect to tax relief.
For the latest updates, please go to our website and view the COVID-19 page.
You can also contact your tax agent, or ring our contact centre to discuss your specific situation.
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