NZPPA Payroll Conference October 2018 Payroll Issues

Topics Covered New Employees and Tax code declaration Commission Bonus Holiday pay KiwiSaver – backdating issues PAYE error correction and adjustment This presentation answers some of the common queries David has passed on. It also addresses some common errors and misconceptions.

New Employees & Tax code declaration

What to do when a new employee starts These are some of the things that must be done: Ask the new employee to complete a Tax code declaration (IR330). If an employee fails to fully complete the IR330 you must deduct tax at the no-notification rate and use the tax code “ND”. Enrol the employee in KiwiSaver Ask the new contractor to complete a Tax rate notification for contractors (IR330C) Keep a wage record Extracted from https://www.ird.govt.nz/tool-for-business/employer/new-employee/new-employee-index.html

Tax code declaration All new employees must complete a Tax code declaration (IR330) when they start working for the employer. If an employee wants to change their tax code, they must complete a new IR330. All new contractors must complete a Tax rate notification for contractors (IR330C) when they start work for employer. If a contractor wants to change their rate of tax they must complete a new IR330C showing the rate they want. Extracted from page 5, 2019 Weekly and fortnightly PAYE deduction tables https://www.ird.govt.nz/resources/2/2/225445ca-c1dd-4f80-98c8-a3c4fff7b425/ir340-19.pdf

Commission Agents & Salespeople https://www.ird.govt.nz/payroll-employers/make-deductions/special-workers/emp-deductions-special-workers.html#ca-sales

Quiz1 JEC company pays schedular payments and monthly commissions to John. John uses the tax code “WT”. Tax on the commissions should be calculated: Under Extra pay rule At the “WT” rate specified on John’s IR330C By adding the gross commission to their gross wage for the period in which it was paid, and calculate PAYE at the “M” tax code rates Answer: B IR330C = Tax rate notification for contractors

Quiz 2 JEC company pays salary and monthly commissions to Ann. Ann uses the tax code “M”. PAYE on the commissions should be calculated: On Extra pay rule At a fixed rate specified by the payroll staff or employee By adding the gross commission to their gross wage for the period in which it was paid, and calculate PAYE at the “M” tax code rates Answer: C

Commission Tax deductions from the income of commission agents and salespeople depend on whether they receive income from commissions only, or from both salary and commission. Agents on commission only Agents who receive commissions only must be taxed on the gross commission as a schedular payment. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/special-workers/emp-deductions-special-workers.html

Commission (cont..) Agents receiving both salary and commission Whether you deduct PAYE using the tax tables or the schedule rates listed on the back of the IR330C, or a rate chosen by the agent (subject to minimums), depends on whether the agent is an employee or self-employed. If an agent is an employee: add the gross commission to their gross wage for the period in which it was paid, and calculate PAYE For an employee receives monthly or two- monthly commission, calculate PAYE on commissions as regular bonuses Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/special-workers/emp-deductions-special-workers.html Extracted from IR335 Employer’s guide July 2018 page 53 – Commission Agents https://www.ird.govt.nz/resources/4/6/46a51d46-8ea5-411e-bde6-2211142f8159/ir335.pdf

WT Tax Rates Extracted from the Tax rate notification for contractors (IR330C) form. Employee can choose a specific rate for their situation but cannot be lower than the minimums.

https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/bonuses/

Quiz 3 Ann receives monthly bonuses from JEC company. Her tax code is “M”. PAYE on the bonuses should be calculated: Under Extra pay rule At a fixed rate specified on Ann’s IR330C By adding the gross bonus to their gross wage for the period in which it was paid, and calculate PAYE at the “M” tax code rates Answer: C

“Bonus’’ Taxing lump sum or "extra pay" payments There are separate calculations for working out tax on lump sum payments from primary and secondary employments. Taxing regular bonuses Bonuses paid regularly are taxed by adding the bonus amount to the employee's gross wages for the pay periods in which they were earned. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/bonuses/

What is a Regular Bonus A regular bonus is any bonus paid frequently throughout the year, such as: monetary incentives production bonuses overtime. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/bonuses/emp-deductions-benefits-bonus-regular-bonuses.html A monetary incentive is a money-based reward given when an employee meets or exceeds expectations. Monetary incentives can include cash bonuses, stock options, profit-sharing and any other type of reward that increases an employee's compensation.

PAYE on Regular Bonus Bonuses paid at same time as regular pay Add the bonus amount to the employee's gross wages for the pay periods in which they were earned. Deduct PAYE from the total, based on the employee's normal tax code. Example: Ordinary weekly wages (tax code "M") $700.00 Weekly bonus for first week of July 2018 $300.00 Total weekly earnings $1,000.00 PAYE on total weekly earnings $179.66

PAYE on Regular Bonus (cont..) Monthly bonuses covering more than one pay period Add up the gross wages paid in the month. Work out the PAYE on the gross wages for the month Add the bonus to the gross wages calculated at step 1 and work out the PAYE for the month on the total. Subtract the PAYE calculated at step 2 from that calculated at step 3.  This gives you the PAYE on the bonus. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/bonuses/emp-deductions-benefits-bonus-regular-bonuses.html

PAYE on Regular Bonus (cont..) Example: Wages (two-fortnightly payments) received in July 2018 (Tax Code "M") $3,200.00 Monthly bonus of July 2018 $500.00 Total monthly earnings $3,700.00   PAYE on the total monthly earnings ($3,700) $617.24 Minus PAYE on Wages received ($3,200) -$522.77 PAYE on the monthly bonus of July ($500 ) $94.47 Add up the gross wages paid in the month. Work out the PAYE on the gross wages for the month Add the bonus to the gross wages calculated at step 1 and work out the PAYE for the month on the total. Subtract the PAYE calculated at step 2 from that calculated at step 3.  This gives you the PAYE on the bonus.

PAYE on Regular Bonus (cont..) If the monthly bonus of $500 was simply added to the fortnightly income of $1,600 to calculate PAYE , PAYE attributable to the bonus would be too high. Wages (one fortnightly payment, tax code "M") $1,600.00 Monthly bonus of July 2018 $500.00 Total fortnightly earnings $2,100.00   PAYE on the total fortnightly earnings ($2,100) $390.72 Minus PAYE on Wages received ($1,600) -$264.54 PAYE on the monthly bonus of July ($500 ) $126.18

PAYE on Regular Bonus (cont..) Bonuses covering more than one month Divide the bonus by the number of months it covers. This gives you the monthly bonus amount. Add the monthly bonus to the normal pay for the month and calculate PAYE. Calculate the PAYE on the normal monthly pay and subtract this amount from the PAYE calculated at step 2 above. This gives you the PAYE on the monthly bonus. Multiply this by the number of months the bonus covers to get the total PAYE to be deducted from the bonus. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/bonuses/emp-deductions-benefits-bonus-regular-bonuses.html

PAYE on Regular Bonus (cont..) Example: Two-monthly bonus of July & August 2018 $1,000.00 Monthly bonus ($1,000/2) $500.00 Wages (three-fortnightly payments) received in August 2018 (Tax Code "M") $3,300.00 Monthly bonus Total monthly earnings $3,800.00 PAYE on the total monthly earnings ($3,800) $636.13 Minus PAYE on Wages received in August 2018 ($3,300) -$541.66 PAYE on the monthly bonus ($500) $94.47 PAYE on the two-monthly bonus ($1,000) $188.94 Divide the bonus by the number of months it covers. This gives you the monthly bonus amount. Add the monthly bonus to the normal pay for the month and calculate PAYE. Calculate the PAYE on the normal monthly pay and subtract this amount from the PAYE calculated at step 2 above. This gives you the PAYE on the monthly bonus. Multiply this by the number of months the bonus covers to get the total PAYE to be deducted from the bonus.

Holiday pay is taxed as regular pay or a lump sum

Holiday Pay From 1 April 2018, if you pay your employee holiday pay in advance as a lump sum, you can choose to tax this payment either: as a lump sum (extra pay), or as if the lump sum was paid to the employee in their regular pay cycle over the pay periods that their holiday covers. This is called the "alternative approach" Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/holiday-pay/emp-deductions-benefits-holiday-pay.html You can find out more about taxing lump sum or extra pay payments on IR web sites.

Holiday Pay (Cont..) Calculate PAYE on Holiday Pay using the alternative approach by: apportioning the lump sum payment across the pay periods that the payment relates to, calculating PAYE on each of these apportioned amounts as if they were the only payments made to the employee in each pay period, adding these PAYE amounts together and deducting this amount from the lump sum payment. Extracted from page 45, Employer guide (IR335) https://www.ird.govt.nz/resources/4/6/46a51d46-8ea5-411e-bde6-2211142f8159/ir335.pdfnd PAYE deduction tables (IR340) and (IR341)

Holiday Pay (cont..) PAYE on holiday pay = $347.36 Example: Your employee is taking three weeks annual leave and has requested that you pay their holiday pay in a lump sum before they take their leave, and you decide to tax this using the alternative approach. Three weeks annual leave $2,238.00 (3 x $746) Regular fortnightly pay $1,492.00 (2 x $746) Holiday Pay Gross Earnings PAYE (Tax Code "M") First fortnight's pay (2 weeks) $244.14 Second fortnight's pay (1 week) $746.00 $103.22 $347.36 https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/holiday-pay/ PAYE on holiday pay = $347.36

Holiday Pay (cont..) Calculate PAYE in this instance for the part of the pay period not taken as annual leave by: adding together the amount of the holiday pay and the regular salary/wages for the pay period, calculating the amount of PAYE that is required to be withheld from the combined amount as if it were a single payment, this is the total PAYE payable for the pay period, subtracting the PAYE that was deducted from the amount of the holiday pay apportioned to that pay period from the amount of PAYE calculated in the previous step. The amount left is the amount of PAYE to be deducted from the payment of salary/wages. https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/holiday-pay/

Holiday Pay (cont..) Example: Gross Earnings PAYE (Tax Code "M") Second fortnight's pay 1 week worked $746.00 1 week holiday Total amount paid $1,492.00 $244.14 minus paid for 1 week holiday -$746.00 -$103.22 PAYE on the second fortnight's pay for the payment for 1 week worked $140.92 https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/holiday-pay/

How to calculate KiwiSaver and SL on Holiday Pay If your employee is a member of KiwiSaver or has a student loan, these deductions and repayments will be calculated on the lump sum as a whole, even if you choose to calculate PAYE using the alternative approach. Extracted from https://www.ird.govt.nz/payroll-employers/make-deductions/staff-benefits/holiday-pay/emp-deductions-benefits-holiday-pay.html

KiwiSaver – backdating issues

Quiz 4 Helen joined KiwiSaver (KS) on 1 April 2018 by giving the KS deduction form (KS2) to her employer (ABC). ABC failed to make KS employee and employer contributions. Inland Revenue sent a letter (KS003) to the employer requesting they start making deductions / contributions on 24 September 2018. ABC will have an obligation to Back date the KS employee contributions (deductions) and employer contributions Back date KS employer contributions only Back date KS employee contributions (deductions) only Increase the KS employer contribution and KS employee deduction in the current pay period Answer: b Slide 2

Quiz 5 Mary commenced employment with ABC from 1 April 2018. ABC failed to automatically enrol her for KiwiSaver (KS). Mary opt-in to KS by giving ABC a completed KS2 form on 6 August 2018. ABC did not commence KS employee or employer contributions until 30 September 2018. Inland Revenue sent a letter (KS003) to the employer requesting they started making deductions / contributions on 24 September 2018. When is Mary entitled to receive backdated Compulsory Employer Contributions from? 1 April 2018 6 August 2018 24 September 2018 Not sure. Answer: a (or call IRD if you are not sure) Call IRD if you are not sure.   Slide 2

KiwiSaver – backdating issues Limited compulsory employer contributions (CEC) backdating liability applies in situations where: The employee was subject to automatic enrolment, or The employer received an opt in via KS2 (from a new employee), or The employer received notice from Inland Revenue that the employee opted in via a provider, and The employer did not make deductions / contributions, and The employee still worked for the employer at the time they contacted Inland Revenue about the employer not deducting / contributing. If the employee's circumstances meet the above requirements and the employee is making contact with Inland Revenue within 12 months of starting new employment, then CEC can be backdated to the start date of employment. Refer to http://kbweb/knowledge+base/business.nsf/0/4bce9fa94af7427acc2578750080adc6?OpenDocument&TableRow=2.0 (from IRD Knowledge base)\

KiwiSaver – backdating issues (cont..) If the employee's circumstances meet the above requirements and the employee is making contact with Inland Revenue after 12 months of starting new employment, then compulsory employer contributions (CEC) entitlement will commence from the day before Inland Revenue sends a letter (KS003) to the employer requesting they start making deductions / contributions Note: Employees cannot have backdated employee contributions/deductions made from their salary/wages, even if they request it. The employee could make a voluntary contribution via their provider. Refer to http://kbweb/knowledge+base/business.nsf/0/4bce9fa94af7427acc2578750080adc6?OpenDocument&TableRow=2.0 (from IRD Knowledge base)\

Correcting an employer return after you've filed it

Correcting an employer return after you've filed it (cont..) To make a correction to your Employer monthly schedule (IR348) if you file using ir-File, or your Employer schedule (IR348) if you're a paper filer you can: send IRD a completed Employer schedule amendments (IR344) form, or call us if there are only a small number of changes and we'll update your IR348 over the phone. You can also use the IR344 to correct the ESCT amount on your filed Employer deductions (IR345) form. If you're a payday filer you can correct your Employment information schedule in myIR. Extracted from https://www.ird.govt.nz/payroll-employers/returns-payments/correcting-ems/emp-returns-correcting-ems.html

PAYE error correction and adjustment Publications on the “Parliamentary counsel office New Zealand Legislation” web site: Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill (stage: select Committee) Cabinet paper: PAYE error correction regulations and legislative amendment Cabinet paper attachment: PAYE error correction and adjustment – anonymised summary of feedback The bill has been passed yet.

PAYE error correction and adjustment–an officials’ issues paper Types of error and adjustments: Reporting errors When the pay and tax were correct but the amounts were wrongly reported, just amend the original return. Payroll correction: Underpayments No correction required as employees are taxed when the underpayment is paid. Refer to PAYE error correction and adjustment–an officials’ issues paper https://taxpolicy.ird.govt.nz/publications/2018-other-mts-cabinet-papers/cabinet-paper-3-1-paye

PAYE error correction and adjustment Payroll correction: Overpayments , may be corrected by: by amending the original return(s), or by recalculating the pay and tax in the pay periods that require correction, and netting the amounts off the values in a subsequent return. If legally able to and with the agreement of the employee, by reducing the gross income in a subsequent pay period and reporting the reduced figures in a subsequent return. If the overpaid amount is not repaid it should continue to be taxable as PAYE income, no adjustment is required. Refer to PAYE error correction and adjustment–an officials’ issues paper https://taxpolicy.ird.govt.nz/publications/2018-other-mts-cabinet-papers/cabinet-paper-3-1-paye