IRD Compliance: 5 Filing Scenarios That Trigger Reviews

High contractor-to-employee ratios trigger immediate IRD attention, especially when similar roles receive different classification treatment. The enforcement focus has intensified because misclassification saves businesses significant costs in ACC levies, holiday pay, and KiwiSaver contributions—creating unfair competitive advantages.

IRD conducts site visits to verify classifications, particularly in sectors with high cash transactions. They're looking for contractors working exclusively for one employer over extended periods, workers lacking genuine independence, and the telltale pattern of converting employees to contractors during financial pressure.

The classification requires genuine independence across multiple dimensions. Workers need to control how, when, and where work gets performed. The work shouldn't be integral to your core business operations. They should bear financial risk and provide their equipment. Most importantly, both parties need genuine intention for an independent contractor relationship.

Document these elements systematically for each contractor relationship. Written contracts specifying independence arrangements, evidence of workers serving multiple clients, equipment ownership records, and financial risk allocation. Review quarterly because employment characteristics can evolve gradually without triggering internal recognition.

Managed payroll services include access to employment law specialists through partnerships with legal experts—crucial guidance for borderline classification cases that could trigger Employment Relations Authority complaints and significant back payments.

IRD's data matching systems automatically identify related entities and analyse payment patterns for potential tax avoidance arrangements. Red flags appear when directors receive salaries from multiple companies in alternating months or employees work for Company A but receive payments from Company B without a clear commercial rationale. The investigation triggers intensify when payment timing doesn't align with genuine business activities or when salary costs shift between entities following seasonal patterns that don't match actual business cycles.

Successful management requires centralised coordination. Designate one person responsible for PAYE obligations across all entities. Document the commercial rationale behind cross-entity payments through written service agreements, time allocation records, and board resolutions approving employment arrangements.

IRD requires employment information filing within two working days of payday. Late filing penalties start at $250 monthly, regardless of how many times you file late in that month.

Coordinating filing dates across entities prevents red flags from mismatched timing while ensuring compliance with these tight deadlines. Multi-entity coordination through centralised platforms eliminates timing discrepancies while maintaining proper separation for legitimate business purposes.

STC certificates and secondary tax codes create complex compliance requirements that frequently trigger IRD investigations. Excessive use of Special Tax Code certificates suggests potential system manipulation, while incorrect secondary tax code applications affect total annual tax calculations across multiple income sources.

The common problems start with using STC certificates beyond their validity periods or applying special rates without proper IRD certification. Employees working multiple jobs often lack proper secondary codes, creating calculation errors that IRD's systems detect automatically.

Managing this complexity requires rigorous tracking. Monthly reviews of certificate validity dates and verification of IRD numbers against certificate details. Document the circumstances justifying special tax rates clearly because IRD reviews these applications specifically for inconsistencies.

Secondary tax code verification becomes critical for employees with multiple income sources. The process involves identifying these situations during onboarding, providing guidance on appropriate code selection, and monitoring for incorrect primary code usage.

Specialised workers need specific treatment under current IRD tax code guidance. NSW tax code for recognised seasonal workers under the RSE scheme, CAE tax code for casual agricultural workers with maximum 3-month periods, and EDW tax code for election workers during 2-week periods only.

Automated tax code validation ensures correct codes based on worker visa status and employment duration, with built-in expiry tracking and renewal reminders. By catching these issues early, you avoid the errors that trigger IRD corrections and subsequent investigations.

Termination payments create multiple compliance hazards because different payment types require specific tax treatment. Redundancy payments use lump sum tax rates without ACC levies, while payment in lieu of notice applies normal PAYE rates with complete ACC levy calculations. Meanwhile, holiday pay settlements require normal rates but with precise Holidays Act 2003 calculations for accrued entitlements.

The errors that trigger investigations include incorrect redundancy payments, including ACC levies, missing holiday pay calculations in final settlements, and termination payments that are categorised incorrectly, affecting tax calculations. These mistakes directly affect employee entitlements and create compliance gaps that IRD's systems identify through cross-referencing with other employer data.

Accurate processing requires clear classification guidelines and calculation verification using IRD's PAYE calculator. Document categorisation decisions carefully because final payment disputes often escalate to IRD review of your broader payroll practices.

Timing compliance adds another layer of complexity. Employment information must be filed before the 15th and month-end PAYE payment due dates, with payments included in the correct tax year period. Reference IRD's employment information guidance for specific reporting timeframes.

Built-in termination calculators automatically apply correct tax rates and ACC rules, while integrated holiday pay calculations ensure compliant settlements and eliminate manual calculation errors.