Sometimes you may pay your employees sums in addition to their normal wages, such as: 

• allowances 
• benefits 
• holiday pay 
• lump sum payments 

Some are tax free, but most are taxable. For some, the employer pays the associated tax. For others, the employer deducts PAYE on the employee's behalf. 

You may also provide various non-cash benefits to your employees as part of their total employment package. Even where the benefits are not in cash, they still have a value which is taxable. 

The tax treatment depends on what the payments are for and the circumstances that apply. 

A brief overview 

Allowances 

There are different kinds of allowances but if it's a straightforward reimbursement to the employee for out-of-pocket work-related expenses, the allowance isn't taxable. Mileage, meals, and tools (including telecommunication devices) are examples. If the amount of the allowance is more than the actual amount of the expense, then the difference is taxable. The employee will be subject to PAYE or you will pay FBT on the difference. 

What about travel? 

Where you pay a travel allowance to an employee, you need to determine whether you are liable for FBT (if you paid for the travel) or the employee is liable for PAYE (if you reimbursed the employee’s travel costs). For a travel allowance to be tax-free, the travel must be ‘on work’ rather than just ‘getting to work’. Different factors affect the tax treatment. 

Can I claim GST on benefits and allowances paid to employees? 

You may be able to claim GST on allowances paid to employees for work-related expenses, if you are registered for GST. Keep all relevant tax invoices. You can’t claim GST for items that aren’t employment related, so this generally rules out claims on benefits. 

Benefits 

Benefits include anything that benefits the employee. They're not wages as such, but they're part of the employee's total employment package. As they're a perk of the job for the employee, you, as the employer, will usually pay fringe benefit tax (FBT) or be subject to PAYE on the value of the benefit. Benefits fall into several categories: non-cash, cash, and so-called special benefits. 

Holiday pay 

The employee is liable for PAYE on pay for annual leave and statutory holidays. 

Lump sum payments 

Pretty much anything else is classified as lump sum payments. These include bonuses, cashed-in annual leave, payments for accepting restrictive covenants, exit inducement payments, gratuities, or back pay, redundancy payments, retiring allowances, and overtime. Employees are usually liable for PAYE on these payments. Note that: 

• the PAYE rate will vary depending on the employee's total taxable income 
• ACC earners' levy won't apply above the maximum liable income threshold 
• redundancy payments and retiring allowances are not subject to ACC earners' levy 

It can be confusing working out the tax treatment of these payments for your business. 

Let us know if you would like to discuss how the rules apply to your business.