Deductions are when you deduct or take money from an employee’s pay. There are lots of different types of deductions, and we’ll go over how to set up the most common deduction types here.
The main categories we’ll be going over are:
Withheld or banked deductions
One off or recurring deductions
A debt-reducing deduction (when you know a fixed amount an employee will pay over time)
Student loan debt repayments
Child support deductions must be loaded in a separate field as they form part of the IRD filing. For guidance on setting up a child support deduction, you can view our article here: Child Support.
Deduction types
Withheld or banked
When you set up a deduction, you will need to specify where you want the money from the deduction to go. Here we will explain the meaning of ‘withheld’ and ‘banked’.
There are two options:
Banked: you can specify a bank account where you want the amount of the deduction to be sent, so the amount is deducted from the employee’s net pay and then sent as as separate transaction to the nominated account.
Withheld: you can ‘withhold’ the deduction in your company account, so there is no separate transaction for the deduction value. The total payroll value that leaves your bank account when you process the pays has had the deduction amount taken off, and the value just remains in your wages account.
If the employee’s deduction is going to a third party, you will set up the deduction to go to the specified account number. You can also specify particulars, code and reference fields depending on what has been requested by the third party.
If the employee’s deduction is to repay you, as the employer, you can choose the most appropriate deduction type for your needs. You may choose to bank the deduction to a nominated account, and you may want to use particulars, code or reference fields to help you reconcile the transactions. You may wish to do this if you want the funds to go to an account which is not your wages account, or if you want to see transaction lines to help reconcile the values.
You should note that if you are arranging your own payments via internet banking, your bank may be charging you per transaction and a banked deduction creating a transaction line is likely to add additional fees for you (although they are typically very small fees). You can specify the same account that you are processing your wages from, so the deduction value will leave your account as part of the total payroll value and then be banked back in.
You may choose to simply withhold the deduction value and not send it to an account.
The value of the deduction can still be tracked easily through reports, or depending on your plan type, via a specific general ledger code. When the total payroll value is deducted from your wages account, the amount of the deduction has already been deducted and remains behind in your account.
One off or recurring
A one off deduction is used when you have an amount to deduct from an employee’s pay as a one off or single instance within one pay run. It does not occur again in the next pay.
A recurring deduction is set up to deduct a value from an employee’s pay each time they are paid. You can set up a total debt amount, which means the deduction would stop when the total debt is repaid. You can also set it to keep deducting until a specific date, or to keep going until you turn it off in the employee’s settings.
Student loan debt repayment
IRD may issue letters to employers of employees who have underpaid their student loans and need to make additional repayments. It must be set up in a special way, as these deductions must be filed to IRD under the correct code. These are called SLCIR deductions. We cover this in this article in a separate section below.
Setting up deductions
Creating an account for a deduction to be banked into
If you need to make deductions from your employees pay that are sent to a third party (such as to the Ministry of Justice or other debt repayments), you may need to create the account in PaySauce before you can create an associated deduction. You can set up deductions to be either withheld or banked into your company account without setting any accounts up.
Go to the ‘Employees’ section in PaySauce and select your employee’s name from the list.
On the ‘Details’ tab, select ‘Accounts’ from the menu on the left.
On the accounts page, click on the downward arrow in the right hand corner then select ‘Standard’ to start setting up a new account.
Enter the bank account name, the bank account number, and any references that you need included on the transaction.
Click Ok when you are done. You can now create deductions to be sent to this bank account.
You do not need to set up accounts for special student loan debt repayments - see 'Setting up student loan debt repayments'.
Creating a debt
Go to the ‘Employees’ section.
Select your employee from the list, then select the ‘Debts’ tab on the right hand side.
Click on the blue plus button on the right hand side to start setting up a new debt.
Enter a name for the debt as well as the total value you want to deduct (not the amount you want to deduct each pay).
Specify where the money should go for this debt - it will either be withheld (as described above in this article) or go to a company account. If you need to set up a new account for this debt to be paid into, you’ll need to do that first (see Creating an account for a deduction to be banked into). In this example, the value is being ‘withheld’, meaning it is going to stay behind in the company bank account.
Click Ok to save the debt.
We must now create the associated deduction linked to this debt, so carry on to the next step.
Creating a recurring deduction
This section is about creating the payment which is attached to your employee’s pay. If you need the deduction to be sent to a third party account which you haven’t already set up, or if you need the deduction to have a total debt amount, then go through our steps first on setting up an account or a debt (above).
Go to the ‘Deductions’ tab of your employee’s settings.
Click on the blue plus button in the right hand corner.
In the ‘Rule’ field, choose the payment type that you want to use for the deduction.
Payment types you can select for deductions:
Fixed amount: lets you specify a dollar value to be deducted each pay time
% gross taxable: when you calculate the pay, the deduction will be created as the specified percentage of all of the employee’s taxable earnings in each pay. Non taxable earnings are excluded from the calculation. You can specify a maxmium amount if you wish.
% net income: when you calculate the pay, the deduction will be created as the specified percentage of all of the employee’s net pay (after tax) in each pay. You can specify a maxmium amount if you wish.
% student loan deduction: typically only used to set up special student loan debt repayments. Calculates as the specified percentage of the employee’s student loan value in each pay.
In the ‘Title’ field, give the deduction a name. The employee will be able to see the name of the deduction on their payslip.
In the ‘Frequency’ field, select the appropriate option:
Until further notice: the deduction will continue to apply to each pay until you turn it off in the employee settings.
Until set date: the deduction will continue to apply until the date that you specify.
Linked debt: the deduction will be linked to a debt if you have created one (see instructions for creating a debt). Select the relevant debt and check the box to saying ‘remove debt once repaid’.
Set either the amount or the percentage (depending on the payment rule you have selected).
Set where the amount for the deduction should go to.
If you want the deduction to be withheld (remaining in the wages account), do not select an account. Simply leave the account field as it is, showing <select one>
If you want the deduction to be appear as a transaction being banked into your company account, select the account from the list.
If the deduction is to be sent to a third party, for example if it is a court ordered repayment or attachment order, then select the account you have created previously (see ‘Creating an account for a deduction to be banked into’).
Click Ok to finish.
Setting up a one off deduction
If you want to set up a deduction that only applies to one pay, you can do this within the pay run.
Go to ‘Run a Pay’.
Your employee’s pay should be in the data entry state. If it is not, return it to data entry.
Click on your employee’s name on the pay card.
Select the ‘Deductions’ tab.
Click on the blue plus button to start a new deduction.
Set up the deduction details. These are set out in detail above under ‘Creating a recurring deduction’, but to recap:
Use the rule field to specify the type of payment: fixed amount for a set value or the appropriate percentage choice.
Enter a title which will appear on reports and payslips.
In the ‘Frequency’ field, select ‘One off’.
Specify where you want the deduction to go: either withheld by not making an account selection here or by choosing the account in the drop down.
Before saving the deduction, ensure you have selected the checkbox for ‘Apply changes to this pay run only’ at the bottom of the window.
Click Ok to save the deduction details, then Ok again to return to the pay run.
The process is almost the same as setting up a recurring deduction, but we’re doing it from within the pay run and not saving the changes for future pays.
How to set up a student loan debt repayment
If you have received a letter from IRD stating that compulsory extra deductions must be made, this is how to create that deduction. It must be set up in this way, as these deductions must be filed to IRD using the correct code. Using this option ensures that we classify it to the right code for you.
These are called SLCIR deductions.
Create the debt. The letter should have advised you of the total amount due to be repaid. Follow the instructions above for creating a debt, and select Yes to the question ‘is the debt SLCIR related?’
Create the deduction. Follow our instructions above for creating a deduction.
In the Rule field, select ‘% student loan deduction’.
In the Frequency field, select Linked Debt and choose the SLCIR related debt you have just created.
The Percentage field should be set to 41.67%. The letter will say 5%, but to achieve the correct 5% outcome that IRD is asking you for, the percentage should be set to 41.67% here.
It is possible to also set up SLCIR deductions from the employee’s tax code area. We suggest you only use this if you don’t know the total debt value from IRD. The method described above is the preferred method, as IRD will typically always include a total debt value now.