Paying employees correctly

Paying your team correctly is an essential part of running a retail business.

Whether you have two employees or 20, payroll comes with legal obligations, record‑keeping requirements and deductions you must make each pay cycle.

This overview covers the key things retailers need to consider when paying employees–from tax deductions to leave, allowances to KiwiSaver obligations.

What deductions employers need to make

Every pay cycle, retailers need to make certain deductions from employees’ wages. You generally cannot deduct money from wages unless it is required by law (mandatory deductions), or the employee has given written consent (voluntary).

Mandatory deductions

Employees earning a wage or salary are taxed directly from their pay. This is known as PAYE (pay as you earn).

As an employer, you’re responsible for deducting and paying PAYE income tax on your employees’ behalf

You make PAYE deductions based on the tax code your employee has given you. Request a tax code declaration form from each new employee to ensure their payroll is set up correctly, and keep the form with their employment records.

Employers make PAYE payments to IRD 1-2 times per month, depending on annual PAYE and ESCT (Employee Superannuation Contribution Tax).

KiwiSaver is a voluntary savings scheme to help set employees up for retirement.

Employers are required to:

Provide new eligible staff with the KiwiSaver information pack,
Enrol new staff who meet the eligibility criteria,
Deduct employee KiwiSaver contributions each pay cycle if they remain enrolled,
- Employees can request their contributions to be either 3.5%, 4%, 6%, 8% or 10% of their gross pay.
- Your employee tells you which rate to use on their KiwiSaver deduction form – KS2.
- If an employee does not choose a contribution rate, use the default rate of 3.5%.
Make employer contributions where required,
- The lowest rate for your contribution is 3.5% of your employee’s gross salary or wages.
- Employers do not have to match an employee’s contribution, even if the employee chooses to contribute more than the minimum default amount.
Calculate and deduct ESCT (employer superannuation contribution tax) correctly based on each employee’s income and length of employment.

Employers can stop making employer contributions when an employee turns 65 years old.

View IRD’s KiwiSaver employer guide

Employer superannuation contribution tax (ESCT) is deducted from your employer contributions to your employees’ KiwiSaver or complying funds.

You need to work out the ESCT rate for each employee. The rate depends on how much your employee earns and how long they’ve worked for you.

There are two ways to deduct ESCT, you can either:

deduct ESCT from each employer contribution
include your employer contribution in your employees’ gross salary or wage. Tax is deducted under the PAYE rules.

Employers are required to:

Tell the IRD about their employees who have student loans
Keep records of loan repayment reductions
Record the reductions on the monthly PAYE return

Where an employee has a student loan, they must advise you to deduct student loan repayments by indicating the relevant tax code on their tax code declaration form.

You can use the PAYE tables provided by IRD to determine the total deduction, including the student loan repayment, by referring to the code’s column.

If you report a new employee to IRD who owes child support, IRD will notify you how much should be deducted from their pay, and how often to deduct the payments.

The maximum amount of child support you can deduct is 40% of their net earnings (after tax). This is called ‘protected net earnings’. Protected net earnings are usually only affected if you’re paying an employee less than their usual pay, for example, if they take unpaid leave.

Protected net earnings only apply to child support. You should still make other deductions in full, even if these add up to more than 40% of your employee’s pay.

If the child support deduction that IRD asked you to make is more than 40% of your employee’s net pay, you should only deduct 40% of their net pay amount. IRD will arrange with your employee to pay the balance, so you do not need to make up the missing amount in future pays.

Voluntary deductions

Deductions may be made from wages owing to the employee as long as both you and your employee have agreed to make those deductions. These deductions must be agreed in writing and signed by both parties.

Even if your employment agreement includes a clause that authorises the employer to make deductions in cases of overpayments or other incurred costs, you are still required to consult with employees before making a deduction from their wages.

Sometimes employees may request specific deductions to be made automatically from their pay. You should instruct them to make these requests in writing and keep them in your personnel records. Examples of deductions that could be requested by an employee include:

union fees
health insurance or other insurance payments
other superannuation schemes besides KiwiSaver
loan repayments besides student loans
alimony or spousal support
recurring charitable donations

Before making any deduction in accordance with a general deduction clause in a worker’s employment agreement, the employer must first consult with the worker, clearly explaining the reason for, and amount of, deduction, and genuinely consider the employee’s feedback.

Examples of reasonable deductions the employer may consult with an employee about may include:

cost of tools, equipment, key cards or any other company property not returned at the end of employment
purchase of goods or services on staff account
traffic infringement incurred whilst using company vehicle
overpayments

Even with consultation and consent, an unreasonable wage deduction could still be considered unlawful, and could also be considered as wage theft under the Crimes Act. Some examples of deductions that would likely be considered inappropriate include:

poor performance
punishment for misconduct, as a disciplinary outcome
“premiums” or fees paid to employer for securing or keeping a job

In most cases, it would be unlawful to make a deduction for unauthorised absences or insufficient notice period on resignation; employers are encouraged to seek professional advice if considering this type of deduction.

Employers do not have to pay employees if they suspend the employees while they are on strike.

If an employee is engaged in a partial strike, where they are still doing some form of their work, the employer can make “specified deductions” from the employee’s salary or wages, except where the strike is lawful due to health and safety concerns or other valid exemptions.

The employer must notify the employee in writing of their intention to make a deduction as soon as reasonably practical, and before the deduction is made or the end of the first relevant pay period.

Employers have two methods for making pay deductions in the case of a partial strike.

Deduct 10% of the employee’s pay for the period of the partial strike, or
Calculating the amount of time the employee would have spent performing the work not done.

Paying employees for leave and public holidays

Retail often involves variable hours, weekend work and public holidays, so it’s important to get leave calculations right.

Different types of leave require different calculations. Below are the main types of leave calculations.

Relevant Daily Pay (RDP) is what the employee would have earned if they worked that day. It includes base pay, commissions, incentives, overtime, and benefits they would normally get on that day.

This method is best for employees with fixed hours and clear daily rates. It is also the default payment calculation.

If the employee’s daily pay varies too much to calculate a “relevant” rate, then you can use Average Daily Pay (ADP) (below).

Average Daily Pay (ADP) is the employee’s total gross earnings from the past 52 weeks divided by the number of full or part days worked or paid.

This method is best for with irregular or variable hours or where it’s not practical to work out what they would have earned that specific day.

Note that RDP (above) should be used by default; you should only use ADP if the employee’s daily pay varies too much to calculate a “relevant” rate or if their employment agreement specifically allows for it.

Ordinary Weekly Pay (OWP) is the higher of either:

What the employee normally receives for an ordinary week, including base pay, commissions, incentives, overtime, and benefits they would normally get, or
Average earnings from the last four weeks

The four-week earnings average would be appropriate for employees who may have worked overtime or covered extra shifts, etc.

Average Weekly Earnings (AWE) is the average of the employee’s gross earnings over the 12 months (52 weeks) prior to the end of the last pay period.

If an employee has guaranteed minimum hours and works fewer than their contracted hours in a pay period, there should be some type of leave recorded to cover the unworked time.

If no leave is recorded, you are generally required to pay their minimum contracted hours even if work was not available.

If the employee asked for time off, instruct them to request the correct leave type in writing or in your leave management system so it is clear the shortfall was due to their request, not a failure to offer their guaranteed hours.

Leave and holiday payments guide

Type of Leave	Correct Payment Type	Notes
Annual leave	OWP or AWE	Use whichever is higher at the time the leave is being taken.
Sick leave	RDP or ADP	RDP by default; ADP only if RDP cannot be calculated.
Bereavement Leave	RDP or ADP	RDP by default; ADP only if RDP cannot be calculated.
Family violence leave	RDP or ADP	RDP by default; ADP only if RDP cannot be calculated.
Alternative holiday	RDP or ADP	RDP by default; ADP only if RDP cannot be calculated.
Parental leave	Unpaid	Employees can apply for income support from IRD
Jury service leave	Unpaid	Employees can request to use paid annual holidays instead of unpaid jury service leave; employers cannot require this.
Public holidays (worked)	RDP or ADP x 1.5	If it’s an otherwise working day, the employee also earns an alternative holiday
Public holidays (not worked)	RDP or ADP	Only paid if it’s an otherwise working day for that employee

Understanding allowances

Allowances are payments made on top of regular wages for specific reasons. They may be ongoing or temporary, and they are usually set out in an employment agreement. In some cases, they can also be agreed for a short period to cover special circumstances.

Different types of allowances are taxed in different ways. If you plan to include an allowance in a job offer or retention arrangement, it is important to understand how it will be treated for tax purposes before making commitments. In general:

Accommodation provided as part of someone’s pay is usually taxable income
Accommodation for temporary work travel is usually not taxable
Meal or clothing allowances that are necessary for the job are generally tax free
Travel allowances for regular commuting are usually taxable
Travel allowances for unusual or one‑off situations, such as getting home safely after late work, are usually not taxable
Allowances for taking on extra duties or covering different tasks are treated as taxable income

Bonuses and Fringe Benefit Tax

Fringe benefits are non‑cash benefits provided by an employer to an employee, or to an associate of an employee, that are taxed under the Fringe Benefit Tax (FBT) rules rather than through PAYE.

They typically involve the private use of goods, services, or assets, and are separate from salary, wages, and cash allowances.

Fringe benefits may be provided on a discretionary or contractual basis.

Employers are required to apply a Fringe benefit tax (FBT) when the following benefits are supplied to employees or shareholder-employees:

motor vehicles available for private use
low interest/interest-free loans
free, subsidised or discounted goods and services
employer contributions to sick, accident or death benefit funds, superannuation schemes and specified insurance policies (excluding employer contributions to superannuation schemes liable for ESCT (formerly SSCWT)
unclassified fringe benefits

Employers must register for FBT and pay tax on benefits provided to employees or shareholder-employees. You’ll have to file an FBT return either quarterly or annually, depending on the election made, and make any payments due.

Payday filing

You must file employment information every time you pay your employees. This is based on the date you pay employees (payday) and may be weekly, fortnightly, monthly or more often if you have multiple paydays. You only need to file employment information for an employee when you pay them.

Employers with total annual PAYE and ESCT of $50,000 or more must file electronically.
If your PAYE and ESCT combined is less than $50,000, you can choose to file electronically or by paper.

You can add employment information in myIR by entering the information into an online form or uploading a payroll file. You can also file directly using your payroll software.

Where retailers can get support

Payroll can be complex, especially in fast paced retail environments with varied hours and a mix of permanent and casual staff. Getting payroll right protects your business, supports your employees and helps avoid costly compliance issues.

Retailers can reduce risk by:

Using payroll software that automatically calculates deductions, like our partner, iPayroll
Reviewing Inland Revenue’s guidance and calculators
Seeking support from Retail NZ by contacting our Advice Service on [email protected] or 0800 472 472 (1 800 128 086 from Australia)