Director salaries and PAYE
When a company director receives payment for their work, it can be structured in two main ways: as a salary or as director's fees. Each is treated differently for tax purposes.
Director's salary (shareholder-employee)
If you are both a director and a shareholder working in the business, you are known as a shareholder-employee. When you pay yourself a regular salary:
- It is treated as a tax-deductible expense for the company (reducing the company's taxable profit)
- PAYE must be deducted from the salary before it's paid to you, just like a regular employee
- The salary is declared in the company's IR4 return under shareholder-employee remuneration
- You pay personal income tax on the salary through the PAYE system
Director's fees
Director's fees are payments made for services as a director (governance duties) rather than as an employee. These are:
- A deductible expense for the company
- Taxable income for the recipient, but they are not subject to PAYE — tax is handled via the director's personal income tax return (IR3)
ACC levies
If you receive shareholder-employee remuneration without PAYE being deducted, ACC will invoice the company separately for your ACC earners' levy based on the remuneration declared in the IR4 return.
How to set up PAYE
If you're paying yourself a salary as a director, you'll need to register as an employer with IRD and file regular Employer Monthly Schedules (EMS). IRD's PAYE calculator at ird.govt.nz can help you work out the correct deductions.
Tip: Getting the structure right from the start saves headaches at tax time. Talk to an accountant about how to structure your remuneration.
Source: ird.govt.nz — Deductions from salary and wages | IR335 Employer's Guide