The change that requires labour hire companies to deduct withholding tax has now been passed into law and the IRD have updated their website, including the new IR330C form. Our first article on this detailed how to handle it in FlexiTime.
As we discuss this with various customers there are some complexities that are being encountered. We will be keeping this article up to date with future updates so we recommend using the Follow button in the header of this article to be notified as it is updated.
Withholding Tax Calculation
If you have your contractors submitting their invoices to you then you should ensure that the withholding tax calculation is being done correctly. The % deduction is applied to the whole dollars amount only. Any cents are removed from the calculation. Thus, if a contractor were to earn $1000.99 and be on 20% withholding tax then the tax to deduct is exactly $200. This is true for all income tax calculations - the cents are removed before calculating the tax. It is the method FlexiTime uses and if the contractor uses a different approach then their invoice will not balance with FlexiTime.
Combining Head Office Payroll
If you're using a different system for your salaried head office payroll you should give consideration to moving this to FlexiTime. The IRD can only accept one set of returns per company, so you won't be able to automatically file your IRD returns from two different systems - you would have to do your IRD filing manually.
Twice Monthly Filing
You may find that with the additional tax being deducted your total tax payments for the year are now in excess of $500,000. If that is the case you will need to start filing twice monthly with IRD, rather than just on the 20th of the month following. You can set this under Company Settings, and find more information about filing twice monthly here.
When you create a pay in FlexiTime it is the Pay Date that determines the Tax Period. A pay for the month of March that is paid mid-April will be in the April tax period and the tax will be declared in the April tax returns.
The Pay Date is also used as the invoice date in buyer created invoices and as the invoice date sent through to Xero. Some companies back date this Pay Date to the end of the month when the work was done.
This will be problematic. For the tax calculations the pay date needs to be the date the money was actually paid.
If you process your invoices in this way then please contact email@example.com so that we can discuss this further with you.
Update March 21: We will be adding an additional Invoice Date to FlexiTime pays that will be available for recruitment companies. So a pay will have:
- Start Date
- End Date
- Pay Date
- Invoice Date
The Invoice Date will be used when invoices are sent to Xero, and will be used as the invoice date on buyer-created invoices.
Doubled Up Tax
In many cases, the March invoice from the contractor will be dated 31 March. Since this is then paid in April it falls in the April 2017 tax period so will have withholding tax deducted. However many of the contractors will have already paid provisional tax on their anticipated earnings to March 31 2017, the tax year that this invoice will fall within. This will result in the month of March essentially being double taxed.
We have enquired of the IRD as to how to handle this scenario and will update this announcement when we get an answer.
Update March 20: The IRD have responded as follows:
These people appear to be using the accrual basis of accounting (ie income is accounted for when it is earned) and not the cash basis (ie income is accounted for when it is paid).
Our guidance to taxpayers (via income tax return guides with reference to the summary of earnings. e.g. https://www.ird.govt.nz/resources/b/a/bac8e2ec-1fb4-42dc-b503-e716df68da41/ir3g-2016.pdf, page 30) is that schedular payments follow a cash basis method of accounting – so the payments made in April, albeit for work or services performed in March, will be recorded in the 2018 income tax returns. It follows that the payments are not then subjected to tax twice, because the provisional tax payments will not relate to payments made in April.
The current no-notification rate for schedular payments with a standard rate of 20% is 35%, however from April 1 2017 this will be changing to 45%, the same as the regular PAYE no-notification rate.
Special Tax Code Certificates
Contractors can apply for a Special Tax Code Certificate with a withholding rate of 0%. An example of where this might happen is if the contractor has their own limited liability company through which they contract and are paying themselves wages with PAYE deducted via that.
To handle this in FlexiTime, change their tax code from WT to STC. In these cases the IRD still requires their earnings to be declared in your IR348. We will be changing FlexiTime to handle this new scenario of IR348 reporting on contractors with no tax deducted.
Differing IRD and GST Numbers
Update March 24.
FlexiTime now allows for a GST Number to be entered against contractors that is different from their IRD number for withholding tax. When you edit an employee and indicate that they are a self employed contractor, you have the option to enter a GST number. Note that this is only required where the GST number differs from their IRD Number (on the Employment tab) - if they are the same then this can be left blank.