For small- to medium-sized businesses, getting it right can be quite a challenge. Payroll is not just essential for managing employee compensation and benefits, but also for complying with laws and regulations. Here are the most common payroll mistakes made by small businesses.

1.     Before your employee starts

Before your new employee starts you need to ensure that you have their employment agreement finalised and signed. This includes their pay rates, usual days of work and any deductions or special clauses. Their contract will also outline how and when they will be paid. With life being busy, it is common to have a new employee sign their new contract on their first shift, but if you do this you void some essential clauses for employers such as the 90 day trial period.

Many employers have a standard contract they keep on file for each new employee, and in some cases, this may have not been updated for many years. If this is you please get in touch with our in-house HR Department to review this to double check you are up to date with any changes to employment law.

Before an employee starts you also must have them fill out employee forms from the IRD. Employees must fill in both the IR330 tax declaration form which gives you their tax code as well as the Kiwisaver deduction form which gives you their rate for Kiwisaver employee deductions.  

2.     Setting up employees incorrectly

Setting up employees correctly in your payroll system is critical as it determines what tax rate they pay, and other deductions.

It’s important to set up employees with the correct pay rate (including any overtime rates) and other deductions, to avoid overpaying or underpaying them. This is especially important if you employ employees and contractors, as contractors typically don’t receive the same benefits as employees (sick days, annual leave, etc).

3.     Using the wrong tax rate

One of the most common payroll errors is using the wrong tax rate. This is often avoidable as your employee or contractor will have specified their tax code and payroll software will automatically calculate their tax rate based on their tax code and annual salary/wages. If you're not using payroll software, you can use the PAYE calculator on the IRD website to work this out. This will help you avoid overpaying or underpaying tax.

4.     Missing payroll deadlines

In theory payroll seems like a quick process but compiling all the employee information such as hours worked, holiday pay, sick pay, overtime, lieu days, can often take much longer than expected. This can either lead to incorrect processing as you rush to make sure payroll is completed on time, so you can avoid the $250 late filing penalty. To make the process run smoothly, we suggest the following:

• Making sure the employees are loaded correctly in the system with all their payment details before you start to process the payroll.
• Using a timesheet system to automatically load days worked, any overtime, and leave – this eliminates human error in adding up hours
• Using a payroll software that connects to IRD so you can electronically file your wages records.

5.     Not paying overtime correctly

Although there aren’t any specified overtime rates, most employers will have an agreed overtime rate for any hours worked over a certain amount. The amount may be specified in the employee(s) contract. If your business pays overtime, you can build this into your payroll system, so it automatically calculates overtime for any hours over the usual weekly or monthly amount for an employee.

6.     Not keeping accurate payroll records

Payroll records must be retained by a business (including sole traders) for a period of at least six years. These records show how much each employee made per hour/per week, employee deductions (including tax, child support and other deductions) and other information. If your business gets audited, the IRD will expect you to have kept payroll records. If you don’t keep complete payroll records, you could face hefty fines – up to $20,000 in a 3 month period, if you have multiple breaches.

Having a payroll software eliminates the need for you to keep these records as it will manually store all your payroll history – any audit reports are available at the click of a button.

If you often forget to pay your monthly PAYE, there are some payroll systems that pay your wages and PAYE at the same time. Give your client manager a call to discuss your options here if you think this system could work for you.

Because payroll is so complex, and mistakes can be so costly, it’s a good idea to get a fresh set of eyes to do a payroll review. Our in-house payroll team live and breathe payroll, and they can do a review of your payroll and make it one less worry for your business. Get in touch with your client manager, who can set up a payroll review for you.