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 info you enter into your payroll software ends up in three different places:
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.
Legal Payroll Revamp
As has been widely reported, parliament is discussing changes to the Holidays Act that would greatly simplify how employers administer their payroll. It would also make it easier for employees to monitor whether they are receiving the correct entitlement.
The current legislation accounts for the various types of leave in days and weeks, making the issue of what a ‘day’ or ‘week’ constitutes for an individual employee sometimes a quite complex matter. Employers have to determine what an employee’s ‘normal’ working days are and how many hours such a normal working day comprises. Payroll software has to rely on payroll administrators having quite good knowledge of these matters, and using payroll software does not protect an employer from getting it wrong,
The new proposed law calculates leave entitlement strictly on the basis of hours worked, without having to define what a standard working day may be for any given employee. Every hour worked accrues a set amount of annual, sick and other leaves for each employee equally, regardless of whether they are part-time, full time, or work irregular hours. As such it proposes to put all employees on an equal footing, and makes calculation of leave entitlements extremely easy and transparent. There are no proposed changes to entitlements as such – the accruals will still work out at the equivalent of 4 weeks annual leave and 2 weeks sick leave per year.
A further proposed change is the increase of leave entitlement payouts for casual workers. At the moment, casual workers, who are not entitled to receive annual leave, receive an additional 8% with each pay, which roughly compensates for the value of that annual leave. This is proposed to rise to 12.5%, which is meant to take into account other benefits that casual workers may miss out on due to their work arrangement. It may also make it more expensive and therefore less attractive for employers to put employees on casual contracts.
There are ‘winners’ and ‘losers’ to these changes. Under present legislation, someone who works 3 days a week, for example, is still entitled to the same sick leave (10 days per year) as someone who works 5 days a week. If taken in one go, the 5-day person would have two weeks paid sick leave, while the 3-day worker could stretch it out to more than three weeks. This is the case even if the two work the same number of weekly hours, and is therefore difficult to justify. Under the new legislation, the 3-day worker’s sick leave would equate to 6 working days, and give them two weeks if taken in one go.
“Winners” under the new system would be employees that reduce their weekly working hours. At the moment, the annual leave they are entitled to is also reduced when that happens, including leave that has already been earned while working the higher hours. The current law is trying to partly compensate for that loss by requiring annual leave to be paid out at the rate of average earnings in that case, i.e the employee will be paid more while they are on holiday for a while. Depending on how soon after the reduction an employee takes their leave, the remaining financial loss of entitlement can still be very significant in this very common scenario. Under the new law, all accrued annual leave entitlement would carry over, in hours.
There are no “anniversary days” in the proposed law, meaning all accrued leave is instantly available to an employee. This may have the effect that employees take their leave earlier in future, reducing the payouts an employer will have to make when the employment finishes.
Are your Employees Hoarding Annual Leave?
October 2025
Payouts for annual leave entitlements when employment finishes can be a significant burden on small not-for-profits, and occasionally staff miss out on these entitlements altogether if the organisation gets into financial trouble and has to wind up. [more…]
In not-for-profits, part-time arrangements with flexible working hours are particularly common. A flexible part-time worker can usually arrange for time off where a fulltime worker would have to take leave simply by jiggling their working days around.
Several years’ worth of accrued leave are not uncommon in this scenario, and can punch an enormous hole in an organisation’s budget. At CCA we have seen one case where 13 years’ worth of leave had been accrued, and had to be paid out when that employee retired.
Organisations that are depending on grant funding may also not always have grant money available at the time that could be used for these payouts, and may have to use their reserves. Most grant makers do not allow you to pay for expenses that were incurred before the grant was made, and using a grant for a large leave payout may be against the grantmaker’s terms and conditions.
So there are good reasons for monitoring your staff’s leave entitlements. If you are using payroll software, it can produce a report showing you the leave entitlements for each employee, and it can also give you a dollar figure of how much these entitlements are worth. That dollar figure, on average, usually sits somewhat below 8% of your total annual wage payments (i.e. less than a whole year’s entitlement on average per employee).
For example, if you are paying $100,000 in wages in a year, you would expect your leave liability be no higher than about $8,000.
Employees may have reasons to accrue leave, for example because they are planning an extended holiday. But if there are no such reasons, and leave keeps accruing to large amounts, an employer may have to take action.
An employer is within their rights to ask an employee to take their leave within a reasonable time frame. If accumulated leave is excessive, the employer should talk with the employee and make a plan to reduce the accrued leave by scheduling time off over the next few months.
One week of each year’s four week entitlement can be ‘cashed in’ by the employee if the employer agrees, which may help with those staff that find it very difficult to be away from work. However, the rest has to be taken. The employer is not allowed to pay it out while the employee is still working for them, and neither can the employee ‘donate’ it to the organisation. The purpose of the leave entitlement is to allow an employee to rest, and the law is quite bulletproof with respect to eliminating an employer’s power to negotiate this entitlement away.