Staff have received a Tax Bill, why?

It’s always at this time of year that we receive calls from clients as some staff have received tax bills from the IRD and they want to know why.

By default the IRD do not issue Tax Bills or a Personal Tax Summary unless you meet the following conditions:

IRD will  automatically send you a PTS by mid-July if you:

  • received Working for Families Tax Credits from us
  • received Working for Families Tax Credits from Work and Income and earned over:
    • $36,827 for the 2010 tax year
    • $35,914 for the 2009 tax year
    • $35,000 for the 2007 and 2008 tax years
    • $20,356 for the 2005 and 2006 tax years
    • $20,000 for the 2004 and previous tax years
  • have a student loan and haven’t had enough money deducted from your salary, wage or benefit income. We’ll also send you an end of year repayment calculation (EYRC) for your student loan.
  • used the wrong tax code
  • used a special tax code
  • used a casual agricultural employee (CAE) or an election day worker (EDW) tax code and earned more than $200 from that source
  • received income as an IR56 taxpayer only.

We send your PTS in July because we need to first process all the employment details that your employer sends us at the end of the tax year.

In addition, some people are required to request a PTS, details HERE!

Now everybody hates paying tax and thus hates getting Tax Bills and one of the most common reasons given is that tax has been calculated incorrectly. The basis for this is that the employee adds up all their earnings and determines the correct tax.  Unfortunetly this is far too simplistic to what happens in practise.

Tax in New Zealand is based on income bands, see Here.  Now the calculation of tax would be a very simple affair if at the beginning of the year we knew exactly how much you are going to earn for the whole year, but this is not the case.  So every pay period your income is taxed across a number of bands so some will be taxed at 12.5%, some at 21% and so on up to a maximum rate of 38%.  So on a pay by pay basis you cannot take your Gross Income and times it by one flat tax rate, and lets not forget ACC Earner Levy that must be added to the total tax take as well.

However, if you earn all your income through straight Salary or Wages then payroll software can pretty well get the tax calculation spot on, but as soon as you start introducing extra payments (regular bonuses, one off bonuses etc) things get a bit more difficult.

Extra payments such as Allowances that are paid on a regular basis are taxed with your normal pay which will  inflate your income each pay and could artificially inflate your tax (as the IRD assumes that is what you will get paid for every pay in the future,  so could tax your income at too high a rate).

If the extra payment is irregular then it is taxed as an Extra Pay and has a totally separate tax calculation to other payments.  In summary, when an Extra Pay is paid you must total the gross payments for the four weeks prior to the date of the extra payment, multiply this by 13 (if weekly) to give an indication of what the employees Annual Gross income MIGHT BE and apply the appropriate tax rate (either 14.5%, 23%, 35% or 40%).

So as you can see if an employee only receives salary or wages, does not receive any form of additional payments, and does not fall under the group that automatically qualify for a PTS then they will generally never receive a tax bill.  But if there is any variation then the calculation of tax is a best guess based on the exact information at the time of payment.

If you fall into the category of employee that receive irregular extra payments, and don’t want a tax bill, then all we can do is tax the irregular payment at a higher rate thereby possibly minimizing the amount of any tax bill.  But, we can never be 100% accurate as that can only occur at the end of the tax year when you add up all your income.  We can force extra payments to be taxed at any of the standard rates you elect but it is up to you to let us know, either on an individual basis or preferably on a company wide basis.

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