If you're employing a child under 18 or paying wages to a young person through your payroll, you may have heard about the tax-free threshold of $2,340. This often leads to questions about whether you need to withhold tax from their pay. This article explains how the tax-free threshold works for children and what your obligations are as an employer.
The $2,340 Threshold Explained
Under Section CW 55BB of the Income Tax Act 2007, school children can earn up to $2,340 per tax year tax-free, but this exemption only applies to income that is not taxed at 'source'. This means the threshold applies to income like:
Money earned from babysitting
Payment for mowing neighbours' lawns
Income from self-employment
The main point to understand is that the exemption does not apply when income is subject to PAYE, such as salary or wages.
Your Obligations
When you employ a child and pay them wages or salary through your payroll system, you are legally required to withhold tax, regardless of how much you expect the child will earn during the tax year.
What you must do:
Withhold PAYE tax according to the child's tax code
File employment information with IRD through payday filing
Treat them like any other employee in terms of tax
You cannot choose to skip taking the tax, even if you know the child will earn less than $2,340 for the year. This is because when income is paid through the PAYE system, tax must be withheld at source - it's a legal requirement, not an option.
What Happens to the Tax?
If a child's total income for the tax year ends up being below the $2,340 threshold, they won't lose that money. The tax withheld during the year can be refunded to them by IRD.
Practical Steps for Employers
When employing a child, follow these steps to ensure you're meeting your obligations:
Obtain an IR330 form: The child must complete a Tax code declaration (IR330) form and provide you with their IRD number and tax code. If they don't have an IRD number yet, they'll need to apply for one.
Process payroll normally: Enter the child into your payroll system just as you would any other employee. PaySauce will automatically calculate and withhold the correct amount of tax based on the tax code provided.
File employment information: Include the child's pay and deductions in your regular payday filing to IRD.
Common Questions
"Can I just pay the child without withholding tax?"
No. If you're paying them as an employee through your payroll system, you must withhold tax according to PAYE rules. The only way to avoid withholding requirements is if the child is genuinely self-employed and invoices you for services (which has different criteria and obligations).
"What if I know they'll only earn $1,000 for the whole year?"
You still must withhold tax. The child will get the money back when they file their tax return or receive an automatic assessment from IRD. The requirement is based on each pay period's earnings and the tax code, not on projected annual income.
"Do I need to enrol them in KiwiSaver?"
This depends on the child's age. There are specific rules depending on their age regarding legal guardians giving consent, and also how they may enrol. They may need to enrol directly through a KiwiSaver scheme provider - not through payroll/their employer. Once they are enrolled you can start making deductions as normal.
Check out IRD's information here: Joining KiwiSaver