In some situations an employer must withhold tax from an employee share scheme (ESS) benefit. In other situations the employer can choose whether to withhold tax.
Your withholding obligations depend on whether the ESS benefit is provided in shares or cash.
You must file employment information about the value of an ESS benefit provided to an employee, even if you do not withhold tax from the benefit.
Filing employment information about employee share scheme benefits
Cash-settled ESS benefits
An ESS benefit is usually provided in shares. However, if the share scheme taxing date is triggered by the cancellation or transfer of the shares or share rights and you’ve paid the employee cash instead, then the benefit is a cash-settled ESS benefit.
If an ESS benefit is in cash, it is an extra pay, and you must withhold tax. In this situation:
- use the ‘extra pay’ tax rate that applies
- deduct ACC and student loan (if they apply)
- KiwiSaver does not apply.
Share-settled ESS benefits
If an ESS benefit is in shares, you can choose to withhold tax. However, you do not have to withhold. If you choose to withhold tax:
- use the ‘extra pay’ tax rate that applies
- deduct student loan (if it applies)
- KiwiSaver and ACC do not apply.
If your employee agrees, you can sell some shares to pay any tax owing.
If you fund the tax (and student loan repayment, if any) on the ESS benefit, this amount is treated as income to the employee. However, it is not part of the value of the ESS benefit. Treat it like an ordinary extra pay.
If you do not withhold tax on a share-settled benefit, then the employee pays the tax through the end-of-year tax process (and provisional tax if it applies). You should let your employee know they’ll have to pay tax on their ESS benefit.
Receiving employee share scheme benefits
Tax Technical advice
Read more on our Tax Technical website about cash-settled ESS benefits and funding the tax cost on an ESS benefit.
IS 24/05 Employer obligations for employee share scheme benefits paid in cash - fact sheet
IS 24/05 Employer obligations for employee share scheme benefits paid in cash
IS 24/06 PAYE – How an employer funds the tax cost on an employee share scheme benefit