Employee Tax Deductions

Who is an Employee?
It is very important you are sure about whether the people who work for you are your employees, or whether they are self-employed.

This is because tax, student loan and accident compensation laws treat the two groups of people differently, and you are responsible for your employees’ tax deductions.

It is illegal to treat a true employee as self-employed to avoid deducting tax.

If you do this you may be prosecuted and fined, and still have to pay the amount of PAYE that you should have deducted. In most cases it will be quite clear whether or not someone is an employee. Generally, if you control how and when the person’s work is done, the person is your employee.

If you answer “yes” to all or most of the following questions, the worker is probably your employee.

  • Does the person have to do the work, rather than being able to hire someone to help?

  • Can you tell the worker what to do on the job, and when and how to do it?

  • Do you pay the worker at a set rate (such as hourly, weekly, monthly, or by unit of production)? A person paid by commission or on a piece-work basis may still be an employee, especially if there are other employees who work on the same basis.

  • Can the worker get overtime or penal rates?

  • Does the person work set hours, or a given number of hours, each week or month?

  • Does the person work at your premises, or at a place that you specify?

  • Do you set the standards for the amount and quality of the person’s work?

Payments to Employees

Employers may make other payments to or on behalf of workers, as well as salaries or wages. You should know about tax deductions for these types of payments including: lump sum or extra emolument payments; bonuses; holiday pay and more.

  1. Allowances
    Allowances are usually paid as a result of an industrial collective or agreement, or an agreement between the employer and employees, commonly called an in-house agreement. Be clear on which allowances are taxable and which are tax-free, the common types of allowances and the process of paying GST on some of these allowances.

  2. Lump sums
    Lump sum payments paid annually or as special bonuses cover: retiring or redundancy payments; gratuities; back-pay; restrictive covenant or exit inducement payments. Know how to make deductions for these types of payments

  3. Regular bonuses
    Bonus payments that you make irregularly, such as Christmas bonuses, are taxed at the lump sum rate. For the current lump sum rates, see the PAYE weekly and fortnightly table or four-weekly and monthly tables.

  4. Holiday pay
    Holiday pay and pay for statutory holidays are included as earnings in the period that you actually pay them to your employees.

  5. Prize money at sporting events and competitions
    Be familiar with the conditions and requirement for deducting withholding tax on prize money at sporting events and competitions

  6. Personal accident premiums
    Know when to deduct PAYE from employee personal accident premiums paid by employer

  7. Compensation for loss of earnings
    Know about compensation for loss of earning paid by insurer or employer and PAYE deductions

  8. Life insurance
    Know when to deduct PAYE from employee life insurance paid by the employer

  9. Honoraria
    Know about PAYE deductions for honoraria paid to employees and those subject to withholding payments

  10. When accommodation is provided
    Know about PAYE deductions for accommodation provided to employees and those subject to withholding payments