Top 6 Payroll Mistakes New Zealand Small Businesses Make: How to Avoid Common Pitfalls

Managing payroll is one of the most critical yet challenging aspects of running a small business in New Zealand. With complex tax regulations, employee entitlements, and strict deadlines, even a small mistake can have significant consequences, including fines from the Inland Revenue (IR) and unhappy employees.

In this post, we’ll explore the top six payroll mistakes that small businesses in New Zealand often make, and provide practical advice on how to avoid these pitfalls. Whether you're just starting out or looking to refine your processes, this guide will help you manage your payroll more effectively.

1. Misclassifying Workers

The Pitfall: Misclassifying workers as either employees or independent contractors is a frequent payroll error. In New Zealand, this mistake can lead to incorrect tax filings, unpaid ACC levies, and missed KiwiSaver contributions, potentially resulting in legal issues.

How to Avoid It: Understand the differences between employees and contractors. Employees are generally subject to your control and follow your direction, while contractors operate their own businesses with more autonomy. Review the guidelines provided by Employment New Zealand and consult with a payroll or legal expert to ensure correct classification. Regularly audit worker classifications to stay compliant.

2. Inaccurate Payroll Tax Calculations

The Pitfall: Payroll taxes in New Zealand, including PAYE (Pay As You Earn), KiwiSaver contributions, and ACC levies, must be calculated accurately. Errors can lead to underpayment or overpayment, resulting in fines from the IR.

How to Avoid It: Use payroll software designed for New Zealand businesses, which automatically calculates the correct tax deductions based on current regulations. Stay informed about changes in tax laws, and consider outsourcing your payroll to a professional service that ensures accuracy and compliance. Regular reviews and audits of your payroll processes can help catch and correct errors early.

3. Missing Payroll Deadlines

The Pitfall: Missing payroll deadlines can disrupt your business operations and lead to dissatisfied employees. Late filing and payments can also attract penalties from the IR, especially if PAYE is not remitted on time, within 2 working days of each payday.

How to Avoid It: Establish a consistent payroll schedule and stick to it. Decide on a pay cycle frequency such as weekly, fortnightly or monthly. Ensure there is enough lead time from the pay cycle period ending and the payment date to gather timesheet data and check IR updates for employees such as child support or other statutory deductions. Automate your payroll processes using reliable software to ensure timely payments. Set up calendar reminders for important payroll deadlines, including PAYE submission to the IR. If delays are expected, communicate transparently with your employees to manage expectations.

4. Incorrect Handling of Overtime and Leave

The Pitfall: Mismanaging overtime pay and leave accruals is another common mistake. In New Zealand, specific rules govern how overtime is compensated and how leave entitlements, including annual leave and sick leave, are calculated. Failing to follow these rules can result in non-compliance and potential disputes.

How to Avoid It: Familiarise yourself with New Zealand’s employment laws regarding overtime and leave. Ensure your payroll system accurately tracks employee hours, overtime, and leave accruals and that each employees profile’s are setup according to their signed employment agreements. Regularly review payroll reports to verify that all overtime and leave are being handled correctly. Provide employees with clear information about how their leave and overtime are calculated and managed. Ensure that annual leave and alternative leave entitlements are regularly taken by employees throughout the year as accruing leave can significantly impact a business’s financial reporting, increasing liabilities, affecting profitability, and creating future cash flow challenges. Finally, check that employees entitlements renew every annual leave anniversary and that the payroll system correctly reflects that.

5. Poor Record-Keeping

The Pitfall: Inadequate record-keeping can lead to a host of payroll issues, from pay discrepancies to difficulties during audits. Maintaining accurate and detailed records is essential for resolving disputes and complying with New Zealand’s record-keeping requirements.

This includes not only tracking hours worked, pay rates, and leave balances, but also ensuring that every employee has a properly executed employment contract and the correct IR tax forms, such as the IR330 Tax Code Declaration, completed and signed. Missing or incomplete documentation can result in legal challenges and complications during audits.

How to Avoid It: Implement a comprehensive record-keeping system that tracks all payroll-related information, including hours worked, pay rates, deductions, leave balances, and critical documentation like employment contracts and IR tax forms. Utilise cloud-based payroll software for New Zealand businesses to securely store and organise these records. Ensure that records are backed up regularly and are easily accessible for auditing purposes or in the event of a dispute. In New Zealand, employment records must be kept for at least seven years, so make sure your system is capable of long-term storage.

6. Business Owner Fails to Have Their Own Employment Contract

The Pitfall: Many small business owners overlook the importance of having their own employment contract, especially if they are actively involved in the day-to-day operations. This oversight can create complications in areas such as KiwiSaver contributions, leave entitlements, and ACC coverage.

How to Avoid It: Even if you’re the business owner, having an employment contract is essential. This contract should outline your role, responsibilities, pay structure, and entitlements, just like any other employee. It ensures clarity in your financial arrangements and helps maintain compliance with employment laws. Consult with an HR professional or legal advisor to draft a contract that reflects your position and obligations within the business. Alternatively, build one yourself with Employment New Zealand’s Employment Agreement Builder tool.

Payroll management is a critical aspect of running a successful business in New Zealand. By avoiding these common pitfalls—misclassifying workers, inaccurate tax calculations, missing payroll deadlines, mishandling overtime and leave, poor record-keeping, and neglecting your own employment contract—you can ensure your payroll processes are accurate, compliant, and efficient.

If managing payroll feels overwhelming or if you’re concerned about the accuracy of your current processes, consider seeking professional help. At Rautaki Bookkeeping, we offer tailored payroll services designed to meet the unique needs of New Zealand small businesses, allowing you to focus on what you do best—growing your business.

Ready to streamline your payroll process? Contact us today for a free consultation and discover how we can help you avoid these common payroll mistakes and manage your finances with confidence.