What is PAYE?
Income tax for employees is collected under the PAYE (Pay as you earn) system. If you are an employer and pay salary and wages, you must register with the Inland Revenue Division and deduct PAYE tax from payments made to your employees. The following payments are subject to tax under the PAYE system:
- Leave/sick pay
- Directors fees
- Allowances (such as living, subsistence, travelling and entertaining etc)
PAYE must also be deducted from non cash benefits provided to employees such as:
Housing, board, lodging; or Motor vehicles
When do I deduct?
You deduct tax at the time you make the payment. Generally this is weekly, fortnightly or monthly.
How much do I deduct?
Inland Revenue provides tables that tell you how much to deduct depending on whether you pay weekly, fortnightly or monthly.
If you provide non cash benefits to your employees such as accommodation, a motor vehicle or other benefits, you will need to account for PAYE on these benefits. IRD can help you work out how to calculate this. At the end of the year the total amount of PAYE tax deducted and paid to IRD should equal the amount of tax that an employee is liable to pay on that income.
Special calculations: Refer to our Guide for taxing bonuses.
When do I pay?
All PAYE taxes deducted during the month must be paid to IRD by the 15th day of the following month. For example, tax deducted during January must be paid to IRD by 15th February.
You must also complete a monthly summary form with your payment. This is called an IR9.
What if I make a mistake?
If you make a mistake during the year of income you can fix this up by adjusting the next pay. For example, John’s employer only takes out $20 from John’s pay for 2 fortnights before realising the error. In John’s next pay, the employer can make the correction by taking out $26 instead of $22. For larger amounts this amount could be spread over a couple of pays.
The employee can file and income tax return with IRD. This is called an IR20 form.
What forms must I complete?
1. PAYE Monthly Summary (IR9): Each month an employer must lodge a PAYE Monthly Summary form with the Commissioner (IR9) by the 15th day of the month following the month in which the payments were made.
2. Annual Certificate (IR2): At the end of the year employers much provide each employee with an annual certificate (IR2) by 31 January of the following year confirming the amount of tax that has been deducted and paid to IRD in relation to that employee. Employers must also lodge a copy of all IR2’s with IRD by 31 January. You can also complete an Annual Summary to check that the correct amount of tax has been deducted and paid to IRD for the year.
3. Annual Summary (IR11): At the end of the year you must also complete an Annual Summary form. This must be sent to IRD by 31 January along with the IR2s.
Whenever you employ someone, you have to keep their wage records for seven years. A good way to do this is to use a wage book.
Each payday, you have to complete these details for each employee:
- total gross earnings, including taxable allowances (this is the amount before PAYE tax is deducted)
- the amount of PAYE tax deductions
- the amount of NPF deductions, and
- The net wage.
Setting up and managing a wage book
Start each tax year on a new page and give yourself space. Use a fresh page for each employee, even if they were only employed for one day. Include all wages for a full tax year in one book. Make sure you get new employees to complete their details.
Summarise the details for each employee at the end of each PAYE deduction period in your wage book. This will be either monthly or twice-monthly. The summary should show totals of gross wages, and PAYE tax deductions.
Employer Obligations summary
Employers will need to:
- complete monthly PAYE Advice Forms (IR 9) and remit tax by 15th of the month following deduction;
- provide every employee with evidence of the tax deducted at the time of payment (for example, a pay slip);
- provide every employee with an annual certificate (IR 2) by 31 January confirming the amount of tax that has been deducted and remitted to IRD in the previous year; and
- provide a copy of all annual certificates to IRD by 31 January.