Termination pay when employee owes business

Hi DG13​,

You’ve mapped out the situation clearly with the final pay. The cleanest way to process the owed amount is to set up a before tax deduction and then manually pop the repayment amount against that deduction in the employee’s final pay. That way, the system recognises the recovery properly without trying to push the pay into the negative. Once that deduction is added, the pay run will process smoothly and the repayment will be recorded exactly where it should be.

Cheers,

Doreen

Many thanks for getting back to me, however your response hasn't helped resolve the issues I have.

Our employee’s last pay was Thurs 5th March 2026, so your response did not arrive in time for me to action any solution before I prepared his final pay.

The deduction method you suggest might possibly work if the employee was continuing to work for us, enabling us to make deductions over a number of pays, but this is not the case – the amount to be repaid is over $1,500. It might also possibly work if the employee was making a one off payment for the overpaid unearned annual leave, but this is not the case either. The plan is that he needs time before he can begin making instalments to pay off this debt.

If we had applied a deduction in his final pay it would have resulted in a negative balance.

My concern is that IRD will have a slightly inflated record of his earnings and the amount of PAYE paid for this income year. I was hoping that the MYOB pay system would have a way of dealing with correcting this issue when preparing the final pay so that the Payday Filing report sent to IRD reflected his reduction in earnings and PAYE for the year.

Do I need to re-do the employee’s final pay? If so I need a clearer understanding of how to process this via MYOB please. I’ve no idea what you mean by your comment ‘then manually pop the repayment amount against that deduction in the employee’s final pay’. He hasn’t actually repaid anything.

Hi DG13,

I appreciate you sharing those additional details.
 

You don’t need to re-do the employee’s final pay, as long as what you processed in MYOB matches what was actually paid to the employee on 5 March. Payday filing is designed to report what was physically paid on that date, so the employment information already sent to IRD is consistent with that payment.
 

Because the employee has now left and will be repaying the overpaid, unearned annual leave by instalments in future, there isn’t a way in MYOB Business Payroll to “spread” that historical overpayment across future pays for this person. Instead, the overpayment is effectively a debt the employee owes back to the business, and the instalments are handled outside of payroll, not as additional pays.
 

In practical terms, here’s what we recommend from an MYOB point of view:
 

1. Leave the final pay and payday filing as they are
The final pay you’ve already processed continues to stand, and the employment information already sent to IRD isn’t changed.
This avoids creating a mismatch between what was reported and what was actually paid into the employee’s bank account.
 

2. Record the overpayment as a debt in your accounting records (not payroll)
If you’re also using MYOB Business for accounting you can, for example:

• Set up a contact for the ex-employee and raise an invoice (or a simple journal) for the net amount they need to repay.
• As they make instalment payments, record these against that balance until it’s fully cleared.

3. Talk to IRD or your tax adviser about the PAYE/earnings position
IRD’s rules about how to treat overpaid income that is repaid over time can depend on the timing and whether there’s a formal repayment agreement.
If you want IRD’s records of the employee’s income and PAYE for the year to be adjusted, that decision and any correction to the employment information return needs to be agreed directly with IRD or your adviser (for example, via the “Amend an employment information return” option in myIR).
MYOB can’t automatically reduce past earnings/PAYE for an ex-employee based on future repayments.
 

Finally, to clarify the earlier advice you were given:
“Manually pop the repayment amount against that deduction in the employee’s final pay” is the method we’d use if the overpayment was being recovered from the final pay itself (i.e. by adding a one-off deduction line in that last pay run).

In your case, because the final pay is already done and there was no repayment in that pay, that step is no longer appropriate, instead, the repayments are best managed as described in steps 2 and 3 above.

I hope this helps!

Regards,
Earl