Creating a Taxable Deduction Custom Pay Type for an Overpayment

This example shows how to set up a custom pay type for a deduction of an overpayment, taxed as part of employee's gross income.

Updated: October 2024

An overpayment occurred where the employee was paid an extra day’s wages when they did not work. They have agreed that this overpayment can be repaid at $20 per pay until the full amount of $240 has been repaid.

This is a taxable deduction for your employee to recognise the KiwiSaver, Student Loan and PAYE calculated on the original overpayment amount.

Let's break down this example.

This deduction is:

❌	A regular payment I can use system pre-loaded pay types for.
✅	I prefer using a custom pay type for clarity on the payslip or/and reporting and tracking purposes.
✅	This is a taxable deduction, meaning taxed as part of the employee's gross wages.

The custom pay type & timesheet should have the following:

✅	Custom pay type created in the taxable section
✅	Rate: -1 (deduction rate is negative)\| Per: unit
✅	Instalment amount entered on timesheet as applicable

Here is an example setup:

Create this custom pay type with a recognisable name in the Employee Profile - Pay Types tab and SAVE.

Select your recognisable pay type from the dropdown timesheet list.

Enter the instalment amount on the agreed day.

The timesheet summary displays all taxable deductions together with the standard pay as one combined Gross figure.

In this example, the $20 overpayment instalment is deducted from the income gross before the tax is calculated. In this way, the employee only pays tax on the balance.

Creating a Taxable Deduction Custom Pay Type for an Overpayment

This example shows how to set up a custom pay type for a deduction of an overpayment, taxed as part of employee's gross income.

Further Resources