For many small to medium-sized enterprises (SMEs) in Aotearoa, managing payroll and staying compliant with the IRD can be a minefield. Even with the best intentions, it’s surprisingly easy to trip up on PAYE (Pay As You Earn) obligations, especially if you’re juggling multiple roles as a business owner.
In this blog, we break down the most common PAYE mistakes NZ businesses make, why they matter, and how to avoid them. Whether you’re handling payroll in-house or working with an accountant, staying sharp on these issues is critical to avoid penalties and keep your team (and the IRD) happy.
1. Using the Wrong Tax Codes
One of the most common PAYE mistakes is assigning incorrect tax codes to employees. This often happens when employers:
- Don’t request a completed IR330 form from new hires.
- Assume all employees are on the standard M (main income) code.
- Fail to update tax codes when an employee takes on a second job or changes their financial situation.
The consequences? Employees may end up underpaying tax, which can result in unexpected tax bills later and frustrated staff. On the employer’s side, it can trigger audits, fines, and backdated payments.
What to do: Always collect the IR330 from new employees. Double-check the IRD’s guidance on tax codes and encourage staff to update their tax information when circumstances change. Tools like myIR and payroll software can also flag potential issues early.
2. Late Filing or Payment of PAYE
PAYE is due to Inland Revenue on the 20th of the following month (or twice-monthly for larger employers), but late filings or payments are surprisingly common. SMEs often get caught out by:
- Public holidays are delaying payments
- Lack of automation in their systems
- Misunderstanding the due dates for filing compared to payment
Even a single day’s delay can incur penalties and interest charges. These quickly add up and can be especially damaging for businesses already feeling cashflow pressure.
What to do: Set up calendar reminders. Automate payroll processes. Ensure your bank transactions are scheduled before due dates, particularly when a deadline falls near a weekend or public holiday. Most modern payroll software in NZ now includes PAYE scheduling features; make use of them.
3. Misclassifying Contractors as Employees
This is one of the trickiest (and riskiest) common PAYE mistakes: treating a worker as a contractor when they legally qualify as an employee.
While it might seem simpler to hire someone as a contractor, avoiding PAYE, leave entitlements, and KiwiSaver, if the IRD or Employment Relations Authority later finds they meet the definition of an employee, you’ll be liable for unpaid PAYE, KiwiSaver, holiday pay, and potentially even penalties.
Red flags for misclassification include:
- The contractor works only for your business
- You dictate their work hours and provide tools or equipment
- There’s an ongoing expectation of work
What to do: Review your contracts and working relationships against the IRD’s employment versus contractor tests. If in doubt, seek professional advice. The cost of getting it wrong far outweighs the time spent checking.
Avoiding PAYE Pitfalls with Professional Support
Getting PAYE right isn’t just a compliance issue. It’s about protecting your business, your people, and your reputation. At Black Arrow, we help NZ businesses stay on top of their obligations with smart payroll systems, hands-on support, and expert advice.
Whether you’re hiring your first employee or managing a growing team, our team can help you avoid the common PAYE mistakes that trip up even seasoned business owners.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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