Top 5 frequently asked questions about Xero Payroll

28 May 2021

Understanding payroll is an important matter for any business. Your payroll software must comply with accounting legislation that relates to salaries, taxes and how and when to pay your employees.

As a Xero Certified Platinum Partner we’ve put together some frequently asked questions to help you navigate paying your employees and having the system run smoothly.

Why is the Annual Leave rate higher than my employees’ normal rate?

When Annual leave is paid out, it must pay the higher of ordinary weekly earnings or average weekly earnings over the past 52 weeks.

If you have paid a bonus or overtime, then this will increase the average weekly earnings – therefore the hourly rate will be higher because it is based on the average rather than ordinary. Most staff are entitled to four weeks’ leave, therefore if they work overtime or are paid a bonus, they are entitled to more annual leave. You can't pay them more days, so the increase in the hourly rate accommodates this.

My staff member has taken leave and the holiday pay has not decreased. Why is that?

The annual leave figure will decrease when annual leave is taken, not the holiday pay.

 Holiday pay increases each pay and only decreases when employees hit their anniversary. At this point it converts to annual leave and the holiday pay figure goes back to $0 – or if your employee is casual, it gets paid out on each pay run.

 If you have a permanent staff member the holiday pay should always be 8% of their Gross earnings from their last anniversary (if they get four weeks’ leave).

How do you pay a bonus in Xero and manage the tax correctly?


 If you pay a bonus in Xero you need to make sure the correct tax is deducted.

·       Check if there is a Bonus Paycode set up.

·       Go to Payroll Settings / Pay Items

·       If not, click on Add on far right. Select Other Gross Earnings.

·       Enter a name for the ‘Bonus’

·       Click on the Rate Type and select ‘Fixed Amount’. Enter an amount if you wish

·       Select an expense code that you want that bonus to go to in Xero > Add

·       Create a pay run if you are paying ordinary hours as well or an unscheduled pay run if you are just paying the bonus.

·       Click Add on the right to add the Bonus earnings type

·       Enter 1 as the hours then enter the amount of the bonus in the rate field

·       Click into the Edit Tax Settings and change the Lump Sum Tax Code to the correct code based on your employee’s annual earnings including the bonus- see below. Enter the bonus amount in the Lump Sum Amount field.  


SB up to $14,000

S $14,001 to $48,000

SH $48,001 to $70,000

ST $70,001 to $180,000

SA over $180,000

Apply, and process the pay as normal.

How do I set up an employee who has Salary Sacrifice in their pay rate?

Salary Sacrifice set up is used when the Full Salary amount is inclusive of the Employer’s KiwiSaver Contribution. 

·       Enter the staff member’s full salary amount under the Salary & Wages section in the Employment Tab

·       Go into the Taxes tab of the employee. 

·       Enter 0.00 under the Employer Contribution % and 3% under the Employer Contribution through Salary Sacrifice%. Hit ‘Save’.

My employee is going from casual to part time, how do I manage this in Xero?

The best way to do this is to ‘final pay’ the employee and add them as a new employee again. Once you have ‘final paid’ them, go into the History tab under Employees and locate the employee. Remove their email address and add their email address as a new employee.

 You cannot have the same email address on any employee – past or present – in Xero. Enter their normal hours per week under Wages and Salaries and their leave entitlements. You need to add them as a new employee so their sick and Annual leave are calculated correctly. 


We know how important it is to have an efficient payroll system. If you have any questions about how to make the most of your Xero Payroll system, get in touch – we’d love to help.
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