Five employer obligations you should know about before hiring workers in New Zealand

A business is nothing without its workers. If you’re a sole trader, you’ll know what it’s like to do everything on your own. Though you’re often stressed and almost-always busy, you don’t have to think about all the regulations that come with hiring employees.

However, if you employ people and you’re running a business in New Zealand, there’s a lot to consider. First, you should register with the Inland Revenue Department as an employer. Doing so will help the department manage your business taxes smoothly and support you in meeting your responsibilities as an employer.

To register as an employer, you’ll need to provide your IRD number, contact details, business industry classification code, and the exact date you start employing people. Once the Inland Revenue Department has your business on file as an employer, they’ll be in touch with information to help you with record keeping and taxation.

That’s just the beginning, though. Here are a few other things to think about and prepare for when you’re employing people.

Pay as you earn (PAYE)

This is the amount of tax your employees pay before they get their take-home salary at the end of each pay cycle. As an employer, you should automatically deduct this amount when you finalise your employees’ pay on their payday. At the end of the income year, your employees should individually file a tax return and if they’ve paid excess, the Inland Revenue Department will refund the eligible amount.

Employees can choose to donate funds to charities approved by the Inland Revenue Department. This is called Payroll Giving. Donating to charity will decrease an employee’s PAYE amount and earn them tax credits. It’s your responsibility, as the employer, to set this up. You can do so in your myIR portal. If Payroll Giving is enabled, at the end of every payday, the money will be automatically donated from the employee’s salary before tax.

Employer Superannuation Contribution Tax (ESCT)

All employers should pay a certain portion of an employee’s salary into their superannuation savings fund, including KiwiSaver. Superannuation is set at a minimum of 3% of an employee’s salary, unless the employee prefers a higher percentage.

Employer Superannuation Contribution Tax is calculated as a percentage of the amount of super you pay for each employee. This will vary based on the employee’s salary and how long they’ve worked for you.

Step-by-step guide to calculate ESCT

1. Work out how much super you’ll pay. For example, if Kevin’s annual salary is $50,000 and you pay a 3% of super, you’ll be contributing $1,500 into Kevin’s super fund.
2. Your ESCT will be a percentage of the employee's super. In Kevin's case, a percentage of $1,500. To find out how much that is, first add the base salary and the super amount = $51,500. The Inland Revenue Department defines the rate of ESCT based on salary range. The rate for Kevin’s salary range ($51,500) is 17.5%. So you’ll pay 17.5% of $1,500 ($262.5) as your ESCT. You can also calculate your ESCT based on the gross salary you’re liable to pay.
3. Once you’ve calculated your ESCT, you should file it with the Inland Revenue Department within two working days of payday. You can either do this manually on myIR, or automatically through a payroll system that’s set up under your myIR account.

Fringe Benefits Tax (FBT)

This is the tax you pay on the value of any fringe benefits you give your employees, such as vehicles for personal use, low-interest loans, health care and insurance contributions, or free and discounted products.

If GST is applicable to any of the goods or services you offer your employees, then your taxable amount for FBT will be inclusive of GST. Most businesses that provide fringe benefits to employees should file their tax every quarter. However, if you have shareholder-employees, you can choose to file FBT every income year.

You can do annual returns if any of the following apply: 

• The combined cost of your PAYE and ESCT is less than $1,000,000 for a given year.
• You only provide a maximum of two motor vehicles only to shareholder-employees.

If you intend to file FBT for the annual year, you should make an election to the Inland Revenue Department by the 30th of June, for the annual year ending the following March.

The value of your overall fringe benefits and the tax you pay depends on the type of benefits, how long you offer them for, and when you file your FBT return. For more information on how to calculate tax on specific fringe benefits, have a look at this guide from the Inland Revenue Department.

Work-related allowances

Aside from fringe benefits, you can also provide employees with work-related allowances, such as accommodation allowances, relocation allowances, meals, and clothing allowances. These may be tax exempt under most circumstances. For more on what type of allowances are exempt, have a look this page on the Inland Revenue Department’s website.

Accident Compensation Corporation (ACC)

The ACC covers all New Zealand residents, including those travelling and those who aren’t employed. In the case of your employees, the ACC will pay to cover the recovery costs of employees’ injury. If any of your employees is injured, during or outside of work, you and the ACC can work out an arrangement to ensure that your employee continues to be paid their usual pay. This can happen in a few different ways:

• If the employee isn’t fit to work, the ACC will pay them up to 80% of their usual pay while they recover.
• If your employee isn’t fit to work, but you pay a full salary until ACC starts paying them compensation, you should file PAYE as per usual.
• If the employee is fit to work and starts work partially, you will pay salary for hours worked, and the ACC will contribute the rest. You should calculate your PAYE based on the reduced-hours salary you pay your employee.
• If the employee is fit to work and starts work partially, and you pay them full salary while the ACC reimburses you for the difference, you should file PAYE as per usual.

Right to a safe working environment

WorkSafe is the government agency responsible for legislating workplace health and safety measures for all New Zealand workers. The agency covers matters of both physical and mental health of workers.

Workplace health and safety requirements vary based on your industry and business. As an employer, you have a duty to inform, educate, and provide high-quality protective tools and equipment for your employees. You should also conduct periodic risk assessments and preventive measures, especially in high-risk situations such as dealing with asbestos, mining and ground exploration, handling and working with hazardous substances, and electrical and gas environments.

In case of adverse incidents or complaints, WorkSafe will investigate the matter on a case-by-case basis. The Employment Relations Authority may also work alongside WorkSafe NZ in investigating some complaints, such as harassment and bullying.

Parting thoughts

After all that, it might seem straightforward and easier to manage everything as a sole trader. However, as your business grows, it's only natural to need more hands on deck. Have a plan for what type of roles you need to hire staff for, and understand the workplace safety regulations applicable for each industry. Even if you only have one admin person working from home, their workstation must meet the requirements to minimise the risk of injury. Take your time in reviewing the guidelines. If you're unsure about your responsibilities, we recommend seeking advice from the Inland Revenue Department for tax matters and the Employment Relations Authority for fair work standards.