Payroll 101: what is a payroll system and why it matters for small businesses
If you’re starting a small business in NZ, understanding what a payroll system is and how it works can save you a lot of stress down the road. Payroll might not seem urgent, until it’s time to pay your first employee or file your first tax return. It’s one of those foundational steps that, when set up right from the start, makes everything else run smoother, giving you more time to focus on growing your business.
What is a payroll management system?
Payroll isn’t just about paying your staff. It’s about paying them correctly, on time, and making sure you don’t accidentally break any laws in the process. The best way you can get it right from Day One is to understand your options, work with a trusted payroll expert, and double-check your set-up.
A payroll system refers to the tools and processes used to manage employee pay, tax deductions, KiwiSaver contributions, leave entitlements, and compliance with employment law. Whether it’s software or a PAYE intermediary, having a solid payroll management system ensures everything runs smoothly.
Think of it like maintaining your car. If you forget to service it, ignore warning lights, or put in the wrong fuel, you could be in for major repairs — or worse, a breakdown at the worst possible time. Payroll is the same. Get it wrong, and it can cost you time, money, and trust from your employees.
Why do I need payroll?
Short answer: because you’re legally required to. Longer answer: because your employees like getting paid , and payroll makes sure they’re paid correctly, with all the right deductions handled.
Payroll isn’t just about salaries either. It ensures:
- You’re calculating leave properly
- KiwiSaver contributions are sorted
- Tax obligations are handled automatically
- You’re not facing fines for mistakes
Do I need payroll only if I have full-time and part-time employees? Or do I need it if I work with contractors, too?
In New Zealand, payroll is required for employees (full-time, part-time, and casual) because employers are responsible for deducting and paying PAYE tax, ACC levies, KiwiSaver, and other entitlements.
However, for contractors, it's different. Since they are responsible for their own taxes, ACC, and KiwiSaver, businesses don’t necessarily need payroll software to pay them. Instead, contractors invoice for their work, and businesses pay them directly. That said, some businesses still use payroll systems to streamline contractor payments — especially if they’re working with a mix of employees and contractors. Some payroll systems also help track payments for compliance and reporting purposes.
So, in short: If you’re only hiring contractors, you don’t need payroll software, but it can still be useful for managing payments efficiently. If you have employees and contractors, payroll software makes the process much smoother.
If the contract doesn't require you to take withholding tax then there may not be any value in putting those transactions through the payroll system. It depends on the contract.
What happens if I get payroll wrong?
One missed payday might not seem like a big deal, but trust us — employees remember. Late or incorrect payments can lead to frustration, low morale, and even legal trouble. Then there’s the IRD, who are not known for being easy going about unpaid taxes.
Common payroll mistakes include:
- Miscalculating PAYE or KiwiSaver deductions
- Forgetting to pay taxes on time
- Not keeping accurate records
- Failing to include leave entitlements properly
Mess up enough, and you could face penalties or back payments, which can be a serious headache (and expensive).
DIY payroll vs. using an intermediary
Whether you're using spreadsheets, payroll software, or a PAYE intermediary, payroll systems for small businesses need to balance compliance, ease of use, and accuracy.
While you can manage payroll yourself, it can be a lot of admin work. If that sounds like too much, consider having a PAYE intermediary, who handles everything — payments, tax filings, deductions — so you can focus on growing your business instead of complex calculations.
Final thoughts
Payroll might not be the most exciting part of running a business, but it’s one of the most important. Get it right from the start, and you’ll avoid stress, keep your team happy, and stay on the right side of the law.
Want to make payroll effortless from day one? Consider using a trusted payroll management system or PAYE intermediary. It could save you time, errors, and stress as your business grows.
Article by Byron Oosthuizen, Marketing Specialist at ThankYou Payroll.
