Wages, PAYE and other deductions

 

Wages isn't quite as universal as GST, but it can still cause problems. It's much easier to check that this is right each month rather than leaving it till year end.

 

The issue with wages is usually timing. So let's say you employ your first worker (or it could be yourself - but make sure you understand the implications of paying yourself wages - it can cause issues at year end). Let's say you pay them monthly. The same principles apply to other frequencies - but it reduces transactions for this example. Similarly we use male pronouns in this example but it could be male or female.

 

So the first month you pay him $4,000. You take off say $1,000 PAYE, using of course the correct tax tables to calculate the tax amount. Now usually people record this as a wages payment of $3,000. But this ignores the principle of timing. You really want the gross wages shown as an expense for the month. We beleive it is far better to code the cheque to wages for $4,000 and PAYE of -$1,000. So it's still a $3,000, but you've recorded the $4,000 to wages and created a liability for PAYE of $1,000.

 

This money is then owed by you to IRD for the employee, so this gets it correct. The same applies to any other deductions you make on his behalf.

 

In the following month, you pay him another $4,000, and deduct another $1,000 PAYE. But you also pay the first $1,000 to IRD. So your account for PAYE has $1,000 owing the first month. The second month it has another $1,000 owing, but it also has $1,000 paid - so again it ends with a balance of $1,000. If you paid him wages at the end of each month, you'd see the balance of the account return to zero with the payment to IRD, and then have $1,000 added back in. But usually you don't actually get a zero balance because you pay more often and / or earlier than that. The principle though is the same - the payment clears the previous balance. If it doesn't you have to investigate.

 

The main other deduction is Kiwisaver, and this is slightly more complex because of the employer contribution, and associated ECST. So you include the Kiwisaver deduction as you do for PAYE, but we suggest you use a separate liability account to keep the information for ease of balancing.

 

StartPrev12NextEnd

Contact us

Email results@businessacademy.nz

 

Skype PhilANZ

 

Phone 04 920 0911

 

P.O. Box 30-545, Lower Hutt 5040

Click here to learn to improve the long-term profability of your business

Login Register

Sign in here for access to the latest newsletters.