Tax an employee’s share scheme earnings in a pay run

From 1 April 2017, you must process most employee share scheme (ESS) earnings through payroll. Depending on the ESS terms and conditions, you can choose to tax these earnings if the employee agrees. If you don’t tax them, the employee may have tax to pay later.

Talk to your accountant or bookkeeper if you’re unsure about taxing ESS earnings.

Add the earnings and deduction pay items

  1. Add an Earnings pay item for the ESS:
    • If you need to calculate holiday pay for the employee, select Other Gross Earnings. If not, select Withholding Income.

    • Name the earnings pay item. For example, Employee Share Scheme.
    • Select a Rate Type.
    • Select the account you want to record the ESS cost to.
  2. Add a Deduction pay item for the ESS benefit:
    • Select Other deduction type.
    • Name the deduction pay item. For example, Purchase of Company Shares.
    • Enter a Standard Amount and select the relevant liability account for your organisation.

Add and remove pay items and process the pay run

Once you've added the earnings and deduction pay items,

  1. In the Payroll menu, select Pay Runs.
  2. Remove any existing draft pay runs in the period you want to use.
  3. Create a new unscheduled pay run.
  4. Select the checkbox of the employee you want, then click their name to open their payslip.
  5. Click the delete icon beside any default earnings to remove them from the payslip.

  6. If you can’t remove a pay item, add a negative adjustment to zero the amount in the payslip. For example, KiwiSaver contributions, child support deductions, Inland Revenue arrears, other amounts calculated on earnings.

    Xero automatically calculates the KiwiSaver contribution if the employee contributes to KiwiSaver.

  7. If the employee has a student loan, add an adjustment to deduct loan payments from their ESS benefit.
  8. Under Earnings, click Add New Earnings and select the Earnings pay item you created earlier. For example, Employee Share Scheme.

  9. In the Amount field, enter the taxable amount for the ESS.
  10. In the employee’s payslip under Employee Taxes, click Edit tax settings.

  11. Enter the tax settings:
    • Payslip tax code - Select WT so the earnings show in the correct column in the Employer Monthly Schedule.
    • Payslip tax rate % - If you’re not taxing the benefit, enter 0%. Otherwise, enter the relevant percentage depending on the employee’s expected overall annual earnings (including the employee’s ESS earnings).
    • Click Apply to recalculate the payslip.
  12. Under Deductions, click Add New Deduction and select the Deductions pay item you created earlier. For example, Purchase of Company Shares.

  13. Enter the remaining net pay as the amount.

    The net pay should be zero so nothing goes into the employee’s bank account. If it's not, you'll need to add a manual PAYE adjustment.

  14. Under Other Pay Information, change the days paid to zero.
  15. Click Save & Close.
  16. (Optional) Click the Memo button Image of the Memo button. to add a personal message to the employee’s payslip.
  17. Process the pay run.

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