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IR335 Inland Revenue Employer's Guide - Part 1

Contents  |  Responsibilities  |  Records  |  Other Payments  |  Penalties  |  Special Workers

Part 1 - Your reponsibilities as an employer

link  Who is an employee?

link  Child support deductions

link  Amounts you will need to deduct

link  Deducting employees' arrears

link  Deducting PAYE

link  Special tax code certificate IR 23

link  Tax code declaration IR 330

link  Withholding payments

link  No-notification rate

link  Certificate of exemption IR 331

link  ACC earner premium

link  Superannuation fund contributions

link  Student loan deductions

link  ACC residual claims levy

Introduction

  • In this part, we explain the tax codes and various amounts you need to deduct from your employee's pay.
  • You must pay these amounts to the IRD by the due dates.
  • This part of the guide explains your day-to-day obligations as an employer.
  • The Ace Payroll program assists you doing all these things.

Who is an employee?

  • It is very important you are sure about whether the people who work for you are your employees, or whether they are self-employed.
  • This is because tax, KiwiSaver, student loan and accident compensation laws treat the two groups of people differently.
  • You are responsible for your employees tax deductions.
  • It is illegal to treat a true employee as self-employed to avoid deducting tax. If you do this you may be prosecuted and fined, and still have to pay the amount of PAYE (pay as you earn) you should have deducted.
  • In most cases it is quite clear whether or not someone is an employee.
  • Generally, if you control how and when the person's work is done, the person is your employee.
  • If you answer yes to all or most of the following questions, the worker is probably your employee.
  • Does the person have to do the work, rather than being able to hire someone to help?
  • Can you tell the worker what to do on the job, and when and how to do it?
  • Do you pay the worker at a set rate (eg, hourly, weekly, monthly, or by unit of production)? A person paid by commission or on a piece-work basis may still be an employee, especially if there are other employees who work on the same basis.
  • Can the worker get overtime or penal rates?
  • Does the person work set hours, or a given number of hours, each week or month?
  • Does the person work at your premises, or at a place you specify?
  • Do you set the standards for the amount and quality of the person's work?
Note: A person can be self-employed in one line of work and still work for

someone else as an employee.

For more help

If you need more help to decide whether your worker is an employee, see the IRD leafet Self-employed or an employee? (IR 336).

call center lady

If you are still not sure, call the IRD on 0800 377 772.

If you decide someone is not an employee, you may still have to deduct tax from any schedular or witholding payments you make to them.

See Also
Difference between employee and self employed contractor.

Amounts you will need to deduct

  • PAYE is the basic amount of income tax you take out of your employees wages whenever you pay them.
  • PAYE includes an ACC earners levy.
  • Besides PAYE, there are other amounts you may have to deduct from your employees pay - these include student loan repayments, child support, and KiwiSaver deductions.

Deducting PAYE

  • Each year the IRD release a new set of PAYE tables containing PAYE rates for the coming financial year.
  • We build these into Ace Payroll and ensure an upgrade is despatched to you.
  • In addition, when new PAYE related schemes such as KiwiSaver are introduced, we upgrade Ace Payroll to ensure compliance is automatic.
  • As long as you remain up to date with Ace Payroll, deducting PAYE and reporting to the IRD each month is easy!

See Also
How can I be sure that Ace Payroll is IRD compliant.
Monthly dealings with the IRD.

Tax code declaration - IR 330

IR330 form
  • You can download an IR330 Tax Code Declaration form.
  • All new employees must complete a Tax code declaration (IR 330) when they start working for you.
  • If they want to change their tax code, they must complete a new tax code declaration.
  • It is not necessary for your employees to complete a new declaration every year, providing their tax code remains the same.
  • Each employee needs to read the notes on the IR 330 to work out their correct tax code.
  • From 1 April 2009 if any of your employees qualify for the independent earner tax credit (IETC) they will be able to choose one of two new tax codes, ME and ME SL.
  • Any new or existing employees who want to receive the IETC as part of their pay will have to fill in a new Tax code declaration (IR 330) choosing one of the new tax codes and give it to you to use from this date.
  • You must keep the tax code declarations for seven years after the last wages payment is made to the employee.

Employees on the wrong tax code

  • It is important employees use the right tax code.
  • Using the correct tax code helps employees avoid a tax bill or underpayment of their student loan repayment obligation at the end of the year.
  • The IRD regularly checks details on the Employer monthly schedule (IR 348) to ensure the right amount of tax and student loan repayments are deducted from salary or wages.
  • When they identify a salary or wage earner using the wrong tax or student loan repayment code, they write to you asking you to change it.
  • The IRD tells you which employees are using incorrect tax codes and let you know which code they should be on.
  • To make sure affected employees pay the correct amount of tax or student loan repayments as quickly as possible, you need to change their tax code to the correct code starting the next pay period.
  • The IRD also writes to any employees using incorrect tax codes to advise them the tax code they are using is incorrect.
  • If any of your employees disagree with this change, please ask them to contact the IRD.

Primary employment

  • Most employees have one main job which is their main or only source of income.
  • This job is primary employment.
  • A taxable pension, beneft or student allowance can be primary employment if it is the main or only source of income.
  • An employee can use only one primary tax code for their main source of income at any time, ie, M, ME or ML.
  • Employees who are repaying their student loan should use the M SL or ME SL tax code.
  • The IR 330 explains how to select a tax code.
  • Once you have entered the employee tax code, Ace Payroll automatically works out how much PAYE to deduct each pay.

Secondary employment

  • If an employee is already using a primary tax code (M, ME, ML, M SL or ME SL) for their main source of income from a job or a beneft and decides to take another job, that other job is secondary employment.
  • The employee must complete another IR 330 for secondary employment, using one of the secondary tax codes: S, SH or ST.
  • Employees repaying student loans must use the S SL, SH SL or ST SL code if they are already using the M SL or ME SL code for another job.
  • See the PAYE tables for the current secondary tax rates.
  • Employees can choose to have their secondary income taxed at a higher rate than would be deducted if they used the S (secondary) code by using either the SH (secondary high) or ST (secondary top) codes on their IR 330 tax code declaration.
  • Using the correct secondary tax code will reduce the likelihood of a tax bill at the end of the year.
  • Unlike the primary tax codes, an employee can use the secondary tax codes on more than one IR 330 at the same time.

No-notification rate

  • Use this rate when an employee or person receiving a salary, wages or schedular payments does not give you a fully completed IR 330 declaration form.
  • You are legally required to use the no-notification rate where the employee or person has failed to give you a completed IR 330.
  • A completed IR 330 declaration must include their:
  • name
  • IRD number
  • tax code.
  • The rate you deduct is either:
  • PAYE of 46.7 cents in the dollar (which includes earners' levy) for employees, or
  • 15 cents in the dollar on top of the normal rate of tax for persons receiving schedular payments.
  • We suggest you insist that an employee fills in their IR330 form and returns it to you as soon as possible - this eliminates the need to tax them at the No Declaration rate.
  • Some employers do allow the employee to be paid before an IR330 form has been returned, and they tax these wages at the normal tax code. However, if you do this then you MUST receive a completed IR330 before the monthly return is produced for the IRD.
  • The key piece of information is the employee IRD number. If you have paid an employee prior to being given their IRD number, at the end of the month the IRD will pick up that there is no IRD number, and ask why you have not used the No Declaration code.
  • If you allow the employee to be paid before they fill in an IR330 form or complete it fully, it is absolutely vital to get this form from them and enter their IRD number into Ace Payroll before you do the monthly returns. This is because the IRD would expect the No Declaration (ND) code to have been used if there is no IRD number for the employee.

ACC earner premium

All employees must pay an ACC earner premium to cover the cost of non work-related injuries. Inland Revenue collects this on behalf of the Accident Compensation Corporation.

For employees, this premium is built into

the PAYE tables and is deducted along with the tax. This means you don't need to do any extra calculations for it in each pay period. You pay the PAYE, which includes the premium, by the due date as usual.

Almost all earnings which are subject to PAYE are liable for the premium. They include

  • wages and salaries
  • overtime pay
  • back pay and holiday pay
  • long-service leave pay
  • bonuses or gratuities
  • taxable allowances
  • shareholder-employee salaries from which PAYE is deducted
  • salaries to partners in a partnership.

The main exceptions are withholding payments, retirement payments, redundancy payments, jury fees, witness fees, student allowances, various benefits, taxable and non-taxable pensions, and tax-free allowances.

Student loan deductions

Some students take out loans under the student loan scheme to help pay for their studies. Borrowers only have to make repayments if they earn over a certain amount called the repayment threshold.

When these borrowers expect to earn over the repayment threshold from primary employment, they must tell their employers to start deducting loan repayments.

They do this by putting an M SL tax code for primary employment, or an S SL or SH SL tax code for secondary employment, on their IR 330

The PAYE deduction tables have columns for the M SL and S SL or SH SL codes, which show the amount of PAYE and student loan deductions to be made.

Employers then have to deduct the loan repayments from these borrowers' wages, and pay the deductions to Inland Revenue with the PAYE deductions.

If a borrower tells you part-way through the year that they should have been using one of the student loan codes, deduct the repayments only from the time you get the new code. It is not your responsibility to deduct repayments if the borrower has not given you the correct code.

You will need to keep records of the PAYE and student loan repayments separately in your wage books.

Ace Payroll makes student loan deductions and keeps the correct records automatically.

Note: Do not deduct student loan repayments

from withholding payments.

By law you cannot discriminate against an employee because of their student loan obligations.

Child support deductions

Inland Revenue Child Support assesses and collects child support from parents who do not live with their children.

The payments Inland Revenue Child Support collects are paid directly to the parent who has care of the child, if that parent is not a beneficiary. If they are a beneficiary, the payments are passed on to the Government.

Employees can choose how they want to pay their child support. It may be a private arrangement which doesn't involve the employer. However, if Inland Revenue Child Support asks you to deduct child support from any employee's wages, you are required to do this by law.

Inland Revenue Child Support works out how much child support a paying parent should pay each pay period. If the parent is your employee, the IRD may contact you for some information. This will usually be details about how often you pay wages, the next regular payday or pay period for that employee and whether you want an employee reference on the notice the IRD send you.

Child support deduction notice

Once the IRD has all the information, they send you a Child support deduction notice (CS 503). This tells you to deduct child support payments from your employee's pay.

Where possible all child support notices issued for the same pay will be in one envelope. To help make it easier for you to process deduction notices call the IRD on to receive the notices in either of the following formats

  1. A consolidated deduction notice. This is a notice in schedule form, showing all additions and changes to child support payments made from your employees' pay (CS 53C).
  2. Both individual deduction notices and a consolidated deduction notice.

The deduction notice shows

  • your employee's name and IRD number
  • the payday or pay period when you must start deducting child support
  • the amount to deduct from each pay
  • employee reference if provided.

Do not make any deductions before the start date on the notice.

The IRD also send a copy of this notice to your employee. Let the IRD know if you believe any details on the deduction notice (CS 503 or CS 53C) are incorrect. If the deductible amount changes during the year, you are sent another CS 503 notice. This shows the new amount of child support, and when you must start deducting the new amount.

Child support has priority over any other

deductions from an employee's net pay. This means that after you have deducted PAYE, you must deduct child support before you deduct anything else (such as student loan repayments, insurances, superannuation or union fees).

The IRD may ask you to deduct child support from payments to someone who is not your employee - for example, a contractor or a commission agent. The notice they send explains how to make and pay the deductions.

Note: Work and Income NZ collects some

money owed to it under previous schemes. If you are making such deductions, continue doing so until Work and Income NZ contacts you. Pay these deductions directly to Work and Income NZ, not to Inland Revenue.

Protected net earnings

All employees must be allowed to keep 60% of their net (after tax) pay, after child support is deducted. This is the employee's "protected net earnings", to cover their living expenses.

"Protected net earnings" applies to child support only. So you must still deduct other deductions such as student loan repayments, insurances, superannuation and union fees from the protected net earnings.

Protected earnings are usually only affected if your employee receives less pay than usual for some reason. If your employee would be left with less than 60% of their net pay, you must not deduct the full amount of child support. If you do not deduct the full amount of child support, do not make up the difference from future pays. Inland Revenue Child Support will make arrangements with the employee to pay the balance owing.

Example 1 - full wages paid

John is liable for payments of $70 child support each week.

John's weekly wage            $ 420.00
PAYE deductions               $  83.11
--------
Net pay                       $ 336.89
Child support deductions      $  70.00
--------
Take home pay                 $ 266.89

Sixty percent of $336.89 (net pay) is $202.13. Because John receives more than this in the hand, the full amount of child support can be deducted. If, for example, John had superannuation contributions deducted, they would be taken from the $266.89.

Example 2 - less than full wages

John has had three days' leave without pay in a week.

John's reduced wage           $ 168.00
PAYE deductions               $  27.55
--------
Net pay                       $ 140.45
60% of $140.45 is             $  84.27
--------
Balance available for child
support ($ 140.45  $82.47) = $  56.18
 
John's take home pay          $  84.27

The child support must be limited to $56.18, because deducting the full $70 would leave John with less than 60% of his net pay. Any other deductions would still have to be taken out of the $84.27.

Paying child support deductions

Child support is due for payment on the same date as PAYE and other deductions. This means it is due on the 20th of each month, (and for large employers, on the 5th of the month as well). Show the total child support deducted for the period on the IR 345 or IR 346.

You also need to show the amount deducted on the IR 348 schedule. See page 24 for instructions on completing these forms. You must keep records of the child support deducted, along with your normal wage records.

Employee privacy and prejudice

The law requires you to protect the privacy of your employees who pay child support. You cannot give out information about their child support obligations apart from

  • when Inland Revenue Child Support asks you for information
  • when you have to give the information as part of running your business; for example, when you have to show your records to Inland Revenue investigators.

By law you cannot discriminate in any way against any employee because of their child support obligations.

It is important you read the full statements about privacy prejudice and penalties.

Deducting employees' arrears

You may receive a notice from Inland Revenue requiring you to deduct tax or student loan arrears from an employee's wages. You must deduct any child support payments before tax or student loan arrears. Pay the arrears to Inland Revenue by the end of each calendar month - separately from PAYE deductions.

Do not use an IR 345 or IR 346 to pay the arrears. Use the IR 901C which you can download from the IRD Online Library on the IRD website.

Special tax code or deduction rate certificate - IR 23

Some employees or other workers may have circumstances which mean you deduct tax at a special rate, or deduct no tax at all. The person will have a certificate which tells you the rate of deductions to make. If you do not see such a certificate, you must deduct the normal rate of tax and other deductions.

People who receive wages or withholding payments may apply to Inland Revenue for an IR 23 certificate. This certificate authorises you to

  • make PAYE deductions using a specified code, or
  • deduct tax at a certain rate, or
  • deduct earner premium only, or
  • deduct student loan repayments at a specified rate.

The IR 23 will be addressed to either one employer or "to whom it may concern" if the person is working for more than one employer.

Checking the IR 23

When an employee gives you an IR 23, make sure it is valid. Check that

  • the person named on the certificate is the person working for you
  • it is properly authorised by Inland Revenue
  • it is for the right tax year
  • the certificate shows the rate for making deductions
  • the employee has signed it.

The certificate shows the period for which it applies. When that period ends, the employee must show you a new IR 23 or complete a new IR 330 and select the appropriate code for their changed circumstances. If you do not have either of these, deduct tax at the no-declaration rate shown in the PAYE deduction tables.

If the IR 23 names you as the employer

  • print the employee's name and IRD number on an IR 330 (unless the employee has already given you a completed form)
  • circle the STC tax code
  • attach the IR 23 to the IR 330.

If the IR 23 is addressed "to whom it may concern"

  • print the employee's name and IRD number on an IR 330 (unless the employee has already given you a completed form)
  • circle the STC tax code at number 4
  • photocopy the IR 23 and attach it to the IR 330
  • return the original IR 23 to the employee.

Making deductions Employees with no student loan

Where the holder of the IR 23 does not have a student loan, calculate their tax by adding the PAYE and any earner premium deduction rates shown on the IR 23 together, then multiply the employee's gross pay by this combined rate. This is the amount of tax to deduct.

Employees with a student loan

If the holder of the IR 23 has a special student loan deduction rate, multiply their gross income by the special rate shown on the IR 23 to calculate the student loan deduction required. Their PAYE will either be deducted at a special rate, if one is shown on the IR 23, or in accordance with the tax code shown on the IR 23. The tax code will be either M SL, S SL or SH SL. As they have a special deduction rate for their student loan, you do not need to use the student loan deduction column in the PAYE tables. Deduct PAYE using the M, S or SH rates shown in the tax tables, then add the student loan deduction calculated.

What tax code goes on the Employer monthly schedule - IR 348?

  • If the IR 23 shows a special rate for PAYE deductions then show STC in the tax code box on your Employer monthly schedule.
  • If the IR 23 shows a special deduction rate for student loans then use the tax code shown on the IR 23 on your Employer monthly schedule. This code should be M SL, S SL or SH SL.
  • If the IR 23 shows a special rate for PAYE deductions and student loans then show STC in the tax code box on your Employer monthly schedule.
  • If the IR 23 shows a special rate for withholding tax deductions show WT on your Employer monthly schedule.

Withholding payments

Withholding payments are payments made to people who are not employees but who are employed on a contract-for-service basis.

The Income Tax (Withholding Payment) Regulations 1979 specify what activities are subject to withholding tax. These activities are taxed at a flat rate of withholding tax. The main activities, and the tax rate for each, are listed in the PAYE deduction tables and on the back of the IR 330. If you are paying someone to do one of the types of work listed you must deduct withholding tax from the payments.

Withholding tax is deducted even if the worker is registered for GST. The only exception is if they provide a certificate of exemption.

Some types of withholding payments - such as commissions, directors' fees, and payments to non-resident contractors - are covered in more detail in Part 5.

Note: Do not deduct earner premium and

student loan repayments from withholding payments. In these circumstances this is the worker's responsibility, not yours.

Do not deduct tax from withholding payments made

  • for work done or services given by a public, local or Maori authority, or
  • to any company (except for non-resident entertainers or non-resident contractors), or
  • to a holder of a current certificate of exemption IR 331.

A worker who is registered for GST will charge GST on goods and services supplied. This means that the worker's gross earnings will increase by the GST charged.

If the worker gives you a tax invoice, work out and deduct withholding tax on the amount excluding GST.

For example, say you receive a tax invoice showing:

Cost                       $ 500.00
plus GST                   $  62.50
--------
GST inclusive              $ 562.50
less withholding tax
(20% of $500)              $ 100.00
--------
Net payment                $ 462.50

You would deduct withholding tax from the $500 and show the $500 as the gross payment on the employer monthly schedule, and show the tax code as WT.

Certificate of Exemption IR 331

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People who are in business for themselves, and who are subject to withholding tax, can apply to Inland Revenue for a certificate of exemption.

If a worker has a certificate of exemption, you can make payments without deducting withholding tax. It cannot be used to exempt an employee's salary or wages from PAYE deductions.

Certificates of exemption are issued for one year only, and must be renewed by 1 April each year.

Checking the IR 331

When you are shown a Certificate of exemption, you must check that it is valid and current.

The work the person is doing for you must be the same as the work shown on the certificate. For example, if the certificate gives an exemption from freelance journalism income, and you hire the person as a theatre prompt, the payments you make are not exempt.

If the certificate is valid, do not deduct withholding tax from payments you make to the holder.

If the certificate is not valid or current, the worker must complete an IR 330 tax code declaration. You must deduct withholding tax from payments you make.

You do not need to include tax exempt payments on your employer monthly schedule. However, you must keep a record of these payments.

It is a good idea to keep a record of the certificate of exemption number, in case Inland Revenue reviews your records. This is located in the bottom right-hand corner of the certificate.

Superannuation fund contributions

A specified superannuation contribution is any contribution to a superannuation fund that an employer makes for the employees' benefit. If your employees ask you to make deductions from their wages and pay them to a superannuation scheme, these are not specified superannuation contributions.

Any contribution an employer makes to a superannuation fund for the benefit of an employee is liable for tax.

The contribution is either

  • taxed at the withholding rate of 33 cents in the dollar, (known as specified superannuation contribution withholding tax (SSCWT)), or
  • treated as salary or wages of the employee and taxed at the employee's personal tax rate (if the employer and the employee agree).

A "superannuation fund" is a scheme which has been registered under the Superannuation Schemes Act 1989.

FOR MORE HELP
To check whether your fund is liable for withholding tax, contact your fund manager.

Specified superannuation contribution withholding tax - SSCWT

An employer is required to make a deduction of SSCWT of 33% at the time of making any specified superannuation contribution. If an employer fails to make a deduction as required then the SSCWT is worked out on the "grossed-up" amount of the specified superannuation contribution. To calculate the withholding tax use the formula

SSCWT calculation formula

Where

    a is the rate of SSCWT, and b is the actual amount paid to the fund.

The "grossed-up" contribution is then

  • the actual amount paid to the fund, plus
  • the amount of SSCWT worked out using the formula.

Example

An employer made a contribution of $1,000 to a superannuation fund. The amount of SSCWT to be paid is (using the formula)

SSCWT calculation example

The gross superannuation contribution is

The amount received by the
superannuation fund                 $ 1,000.00
Plus the withholding tax on
that amount                         $   492.53
----------
Grossed-up contribution             $ 1,492.53

Withholding tax on $1,492.53 at 33 cents in the dollar is $492.53. This is the tax on the grossed-up contribution. The SSCWT is deducted from the grossed-up contribution.

Paying the SSCWT to Inland Revenue

Pay any SSCWT deducted with your PAYE deductions by the due date.

You must let the IRD know if you are paying SSCWT, so they can send an employer deductions IR 346 form to return with your payments. Enter the amount of SSCWT deducted for the period in Box 6 on the IR 346. If you have the wrong form, phone Inland Revenue on 0800 377 772.

Taxing contributions at the employee's personal tax rate

If employers agree, employees can elect to have all or part of the value of the employer superannuation contribution included in their gross salary and wages and taxed at their personal tax rates. This will benefit employees whose effective marginal tax rate is less than 33%. It needs to be made clear to employees that the classification of this amount as salary and wages will have an impact on their family assistance entitlement, the amount of child support they pay and their student loan repayments. It is important that employees understand this and that they can revoke their election at any time.

The actual employer contribution is paid into the superannuation fund - the employee does not receive the contribution in the hand. The value of the employer contribution will be added to the employee's gross wages for the pay period and taxed at the appropriate rate using the PAYE tax tables. The rate will depend on the employee's tax code.

Contributions treated as salary and wages are subject to earner premium which is included in the PAYE deductions, and the employer is liable for ACC residual claims levy payments on the gross amount.

ACC residual claims levy

On behalf of the Accident Compensation Corporation, Inland Revenue collects a residual claims levy from employers each year to cover the ongoing costs of all work injury claims made before 1 July 1999 and non-work injury claims made before 1 July 1992.

The IRD sends an ACC residual claims levy statement IR 68A in March each year along with an ACC residual claims ACC 450 booklet. This statement and payment must be completed and returned by 31 May of each year. For more information call 0800 377 772.

Other sections of the IRD Employers Guide

Contents  |  Responsibilities  |  Records  |  Other Payments  |  Penalties  |  Special Workers

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