Payroll Audits: A No-Stress Guide for Kiwi Businesses

Let's be honest – when most of us hear "payroll audit," we're tempted to run for the hills. But what if I told you that regular payroll audits could save you headaches, money, and potentially awkward conversations with the IRD?

Recent figures show the IRD has uncovered a whopping half a billion dollars in undeclared tax during its compliance crackdowns. That's a lot of cash that businesses now have to pay back, often with penalties and interest tacked on for good measure.

We've been helping New Zealand businesses with their payroll since 2004, and we've seen firsthand how a bit of preparation can turn a potential audit challenge into a straightforward exercise.

The IRD doesn't have the resources to audit every business in New Zealand, so it tends to focus on those that raise red flags. According to the tax experts at Wen & Co., your chances of getting audited increase if your numbers look off compared to similar businesses in your industry.

Are you consistently late filing or paying your PAYE? That's another red flag. The same goes for frequently amending your returns after filing them. And don't underestimate the impact of workplace relationships – tip-offs from former employees are more common than most businesses realise.

Of course, sometimes it's just down to random selection—the IRD conducts routine audits, too. Their systems are constantly getting smarter at spotting anomalies, so maintaining accurate records is essential.

As much as we'd all prefer to avoid IRD scrutiny, the reality is that any business could face an audit. Better to be prepared than caught unprepared.

Good record-keeping is the best approach to payroll audits. The IRD requires you to keep payroll records for at least seven years, and they need to be accessible and complete.

According to the Inland Revenue Department, the essential records you should have on hand include:

Essential records checklist:

✓ Employee details (names, addresses, IRD numbers, tax codes)

✓ Wage records (hours worked, rates, gross earnings)

✓ Deduction records (PAYE, KiwiSaver, student loans)

✓ Leave calculations and balances

✓ Employment agreements

✓ Timesheets and attendance records

✓ Copies of all payday filing submissions

Keeping these organised isn't just good for audits—it also makes your regular payroll processing more efficient. If you're using Smartly's digital documentation features, you've already got a head start because everything's stored securely in one place.

Running your internal audits regularly is like getting a warrant of fitness for your car – it helps you catch and fix minor issues before they become major headaches. Here are the key areas to focus on:

We've seen firsthand how preparation makes all the difference when facing an audit. Many of our customers who run regular internal audits tell us the same thing – when the IRD notification arrives, they don't panic.

From working with thousands of New Zealand businesses, we've learned that the ones that handle audits efficiently have clean, accessible records that are easy to produce when requested, regular internal checks that catch and fix small issues before they develop, and employees who understand their roles in maintaining accurate payroll records.

The difference between a challenging and smooth audit often comes down to how prepared you were before the notification even arrived.

Based on our experience and insights from Education Payroll's audit guidelines, there are three main trouble spots where New Zealand businesses often face challenges:

The Holidays Act continues to be a significant consideration for many businesses. Annual leave calculations for employees with variable hours, public holiday payments, and the calculations for Relevant Daily Pay versus Average Daily Pay all frequently cause issues. Our advanced leave management features are specifically designed to address these challenges.

Think of your payroll system like plumbing—small issues can cause significant problems over time. Using the wrong tax codes, calculating PAYE deductions incorrectly, or getting employer KiwiSaver contributions wrong might seem like minor issues initially, but these errors compound with every pay cycle.

According to IRD, inadequate record-keeping is one of the quickest ways to encounter difficulties during an audit. If you can't produce the records the IRD asks for, they might make assumptions about what you owe – and those assumptions rarely favour your business.

Did you know? The IRD can make estimations about what you owe if you can't provide proper records, and these estimations tend to be conservative from your perspective.

Avoiding audit issues isn't just about having the right software – it's also about developing good payroll habits:

Don't wait for audit time to check your compliance. Set up monthly reconciliations of your payroll accounts to catch obvious errors early. Conduct quarterly reviews covering all major compliance areas. And do an annual comprehensive review, possibly with external expertise, to identify hidden issues before they become problems.

Tax rates, minimum wage, KiwiSaver rates, and other aspects of payroll compliance change regularly. The IRD and MBIE websites, as well as professional bodies like the NZPPA, are good sources for updates. At Smartly, we ensure our system is updated promptly whenever regulations change, taking that burden off your shoulders.

Proactive compliance now prevents significant challenges later. A proactive approach is the most reliable way to ensure your business remains compliant.

Create a workplace culture that values accuracy and compliance. According to Audit NZ, good internal controls are essential for avoiding payroll errors. When everyone knows their role in maintaining accurate records, overall compliance improves substantially.

At Smartly, we understand that payroll audits are probably not your idea of a fun Friday night. That's why we've designed our comprehensive payroll solution to make compliance as straightforward as possible.

Our software automatically calculates PAYE, KiwiSaver, and other deductions correctly. We handle the complex Holidays Act calculations that challenge many businesses. All your payroll records are stored securely in one place, ready for audit time.

The system stays up-to-date with legislative changes automatically, so you don't have to worry about missing something important. And our New Zealand-based support team is available to help you work through any audit questions – no offshore call centres, only local experts who understand NZ payroll inside and out.

Payroll audits don't have to be intimidating. The right preparation, processes, and tools can be a valuable opportunity to strengthen your business. Here's your straightforward action plan:

Step 1: Run regular internal audits to catch issues early

Step 2: Keep thorough, organised records that are easy to access

Step 3: Stay updated with legislation changes affecting payroll

Step 4: Use technology to automate and validate your processes

Step 5: Build a culture of compliance in your workplace

By taking a proactive approach to payroll compliance, you'll not only avoid the stress and potential penalties of audit issues but also build more efficient processes that save time and money year-round.

With the right processes in place, you and your business can confidently approach audits.

Need help getting your payroll audit-ready? We're here to help. Request a call back from our team to discuss how Smartly can help guide you to the requested reports. Check out our comprehensive payroll solution to learn more about how we can help.