For the past few months now we have been investigating how ACC Earner Levy is calculated and reported by all the main payroll software providers and I must say it has totally baffled me.
ACC Earner’s Levy is the ACC component paid by the employee to cover non-work related accidents. That bit is simple.
The amount payable by each employee is capped and based on both a percentage calculation and a gross income threshold. For example, the current rate of Earner Levy is 2% for the 10/11 tax year capped on gross income of $110,018. This equates to a maximum individual levy of $2,200.36.
The figures for the 09/10 tax year were a calculation of 1.7% capped on a gross income of $106,473 or a maximum individual levy of $1,810.04.
A simple enough calculation you might think, you just calculate the EL on every dollar earner until you reach the maximum payable! But alas, that is not how its calculated and what happens if you are working for more than one employer, how can they know when you have reached your EL cap?
The way ACC Earners’ Levy (EL) seems to be calculated by the various Payroll Software companies is (1) work out the gross liable earnings, then (b) multiply it by 2% and add that to the total PAYE deduction. This is how it seems to be done by a couple of very popular payroll packages, but its a flawed logic because it does not take into account the fact that there is a cap on the amount you have to pay.
What should be happening, and this will vary on your pay frequency, is that every pay a figure is calculated taking into account the maximum EL an individual has to pay.
Maybe an example will better show this.
For our example, John earns $3,000 a week, high I know but if you do not earn more than $2,115.73 ($110,018 / 52 weeks) then the calculation will always be a straight 2% of Gross. He also gets the occasional bonus and sales commissions. I’m going to ignore all Tax Calculations for our examples.
Straight Salary – the same amount every week
How many payrolls seem to calculate the EL is Gross $3,000 x 2% = $60, but what should be happening is:
A Gross of $3,000 is greater than the weekly maximum of $2,115.73 therefore the Earner Levy will be $2115.73 x 2% or $42.31.
So assuming John gets paid the exact same each week his total Earner Levy will be $42.31 x 52 or $2,200.36, bingo, all is good.
But have a look at what your payroll is calculating! In most cases it is going to be $60 and if so by the end of the year you have paid $3,120 in Earner Levy or $919.64 too much!
Salary plus Extra Pays
It seems a strange situation but the current legislations states that the Earner Levy cap is not to be applied to Extra Pays. So lets assume that in the above example, four times a year, John received a bonus of $2,500.
As Extra Pays are not factored into the EL cap, the calculation is very straight forward:
$10,000 ($2,500 x 4) x 2% or $200 so if the EL cap is not taken into account, John will end up paying a total of $3,320 ($3,120 + $200) or $1,119.64 too much, remember the maximum payable each year is $2,200.36.
So I would like to ask the various Payroll Software vendors out there the following:
1. Do you apply the EL cap in your PAYE calculations?
2. Do you show the EL calculations on any report so the figures can be verified?
3. How do you report the calculated EL figure to the ACC Department?
We have requested information from the IRD surrounding how they account for Earners’ Levy as essentially they are only collecting it on behalf of the ACC Department, much like Kiwisaver.
We will continue on this theme as we try and find out, What happens to any overpayments of Earners’ Levy?
As the original author of the MYOB Payroll I can say that:
1. It was written to apply the EL cap and it appears to still be doing so.
For a weekly pay of $3000 the total PAYE calculates as $981.35 (being $939.04 tax plus $42.31 Earner levy) using the M tax code. This matches the PAYE tables and the IRD’s online PAYE calculator.
When I add a bonus of $2500 and indicate that this is an extra pay taxed at the ST (Secondary top) the total PAYE calculates as $1981.35. This is an additional $1000 being $950 (38%) tax and $50 (2%) EL. Therefore the EL cap is ignored for the extra pay. This is because extra pays are treated/taxed as if they are secondary income. The user does have the option to just include the extra pay as normal earnings. In this case the total tax is $1931.35, i.e. nil EL.
The cap is not applied for any of the flat rate tax codes (No Declaration, secondary, CAE, …).
2. The EL figures are shown on the annual Employee Earnings certificate. They are also shown on the IRD Schedule which is a report that was required before the EMS schedules came in. Otherwise there has been no requirement or request to show the EL on any reports. Employees only compare/verify the PAYE on their pay slips against the PAYE tables or the IRD online PAYE calculator.
3. The EL figures do not get reported to ACC by employers. I assume the IRD pass this on monthly to the ACC with some sort of annual square up.
If the employee is working for more than one employer then they could be paying excess EL. One of the employers will tax the employee using the M tax code, and the other(s) using a secondary tax code. Neither employer will know when the employee’s total earnings have reached the EL cap.
This issue is one of the reasons why I believe everyone should do a tax return (or request a PTS) each year to ensure they recover any overpaid EL (and/or tax). When doing the tax return all wage & salary earnings are totalled and the correct overall EL is calculated taking the cap into consideration. This is deducted from the total PAYE paid to get the net tax paid during the year. This is then compared to the tax due based on the total earnings for the year and the difference is either refunded or has to be paid. (I’d be happy to demonstrate this.)
The government is currently consulting on simplifications to the tax system. One idea is to make PAYE a final tax, i.e. with no end of year square up! This would require payrolls to be certified by the IRD that they are doing payroll calculations correctly. I’m strongly against the idea of PAYE being a final tax because there are many scenarios (the EL issue is just one of them) where this would be grossly unfair, even if all payrolls calculated eveything correctly. The ability to do an end of year square up is essential for all taxpayers in my opinion.
Hi Payroll Guru, are you 100% certain that the IRD Tax Refund Calculator takes ACC Earner Levies into account and they refund ACC Earner Levy? From what we have found out (and nobody seems to be certain) all Earner Levy is passed onto ACC by the IRD, the ACC keeps no individual record of how much they receive and this have no way of knowing if someone has overpaid. They also have no process to refund any overpayment.
We have asked the IRD for some detail as to what they do when they receive the total PAYE payments each month but yet to hear back from them.
100%. They don’t directly refund any excess AC Earner levy. The excess is effectively treated as income tax paid and will get refunded if the total income tax paid exceeds the total due. I’d be happy to demonstrate this.
The facts that “the ACC keeps no individual record of how much they receive and thus have no way of knowing if someone has overpaid. They also have no process to refund any overpayment.” doesn’t surprise me as this is handled by Inland Revenue.
I too have asked IRD some questions about this, particularly around what, if any, end of year reconcilaition process they have, and haven’t received any answers.