Getting Your Own Pay Right
One of the most confusing areas for new business owners in New Zealand is figuring out how to pay themselves: and how that affects their tax obligations. Get it wrong and you could face unexpected tax bills, penalties, or compliance issues with the Inland Revenue Department.
This guide explains the most common ways NZ business owners pay themselves and what the IRD expects from each.
Why It Matters
How you pay yourself depends heavily on your business structure. A sole trader is taxed differently from a company director, and getting these mixed up is one of the most common mistakes small businesses make.
Sole Traders and Partnerships
If you operate as a sole trader or in a partnership, there is no formal salary arrangement. All business profit is treated as your personal income, regardless of whether you actually transfer money to your personal account.
This means:
- You pay income tax on profit, not drawings
- There is no PAYE to deduct from what you take out
- You will likely need to pay provisional tax based on expected annual income
- ACC levies apply to your net profit
Many sole traders make the mistake of thinking they only pay tax on the money they transfer to themselves. The IRD looks at total business profit.
Company Directors and Shareholders
If your business is structured as a company, you have more options for how to pay yourself.
Option 1: Director’s Salary: You can pay yourself a salary as an employee of your own company. This salary is subject to PAYE, KiwiSaver, and ACC like any other employee wage.
Option 2: Shareholder Salary: A shareholder salary is declared at year-end rather than paid weekly or fortnightly. It is still subject to income tax but works differently from a regular wage.
Option 3: Dividends: If the company has retained profits, you can pay yourself dividends. Dividends carry imputation credits based on company tax already paid, which can reduce the tax you owe personally.
Many company owners use a combination of all three approaches, tailored with the help of an accountant.
What About KiwiSaver?
Sole traders are not required to contribute to KiwiSaver, though voluntary contributions are possible. Company directors who pay themselves a salary must contribute as standard employees, unless they opt out.
Common Mistakes to Avoid
- Treating all money in the business bank account as personal income
- Forgetting to set aside tax on drawings as a sole trader
- Mixing personal and business expenses
- Not keeping clear records of how much you have taken from the business
Tips for Staying Compliant
1. Know your structure: Understand how your business is registered and how that determines your tax obligations.
2. Keep clear records: Document every payment you make to yourself, whether it is a salary, drawing, or dividend.
3. Set aside provisional tax: If you are a sole trader, use a separate savings account to hold funds for your tax obligations throughout the year.
4. Talk to an accountant: Paying yourself correctly from the start prevents costly corrections later.
Final Thoughts: Paying yourself as a business owner in New Zealand is not as simple as transferring money to your personal account. Your business structure, the method you use, and how accurately you record it all affect your tax obligations with the IRD. Getting this right from the beginning helps you avoid surprises and keeps your business financially healthy.
