Using Payroll Software
We have had some dramatic situations with erroneous payroll coding, which caused some organisations to think they are spending a lot more than they actually did. As this can lead to very poor decisions, it is important to understand how payroll software communicates with your accounting software, such as Xero or MYOB.
There are two different types of payroll service providers:
1. Payroll Intermediaries
These are companies, such as Thankyou Payroll or Smartly, which you pay your staff’s wages to, and they pay your staff and sort out the filing with IRD. You will fill in the pay details for each pay run, and they will tell you how much to pay them (or take it out of your bank account directly). Keep in mind that the amount you pay them is the gross wages plus the employer Kiwisaver contribution.
In your accounting software, these payments are put to ‘wages & salaries’, and there is nothing further you need to do.
2. Payroll Management Software
Both Xero and MYOB are offering payroll management software to connect with their main accounting software, or stand-alone. There are a number of other providers, such as ACE (also owned by MYOB) and others.
This software helps you determine what the net pay is you should pay your staff, the deductions you need to pay to Inland Revenue, and it keeps track of your staff’s leave. The key difference is that you still have to do the paying yourself.
Where such payroll management software connects with your main software, it uses Balance Sheet accounts, which are often confusing to understand.
The whole amount, i.e. the gross wages and any Kiwisaver Employer contribution goes into your ‘Wages & Salaries’ expense account (you may have set it up so that Kiwisaver is in a separate expense account). That is the ‘debit’ in accounting.
The payroll software then also puts the amount into two Balance Sheet accounts (which are the ‘credits’). The staff portion goes into a ‘Wages Payable’ account (or similar name), and the IRD portion to a “PAYE Payable”, “Deductions Payable” or similarly named account on the Balance Sheet. If set up correctly, these accounts will show you, at any given time, what you owe IRD and your staff.
The main thing to look out for is how to reconcile the lines from your bank feeds. The payments to the staff need to be put against the ‘Wages Payable’ (Liability) account, NOT the wages & salaries account. Payments to IRD are put against the ‘PAYE Payable’ account. This is where things often go wrong – if payments to staff are put into the ‘wages’ account, you are almost doubling the wages showing in your Profit & Loss reports.
Organisations often set up separate accounts for Student Loan, Kiwisaver and other deductions – this is unnecessary, as tracking these amounts separately gives you no useful information, and these deductions are completely outside of your control. The same applies to the Kiwisaver employer portion: this is part of the overall wages you pay, and it is important that you have a correct figure for your total wage payments.