Did you know that Inland Revenue reviews thousands of small business tax returns each year, and one of the biggest red flags isn’t about questionable deductions, it’s how business owners pay themselves or family members?
Market salary rule for closely held companies
A large portion of New Zealand’s professional practices and investment businesses are structured as closely held companies – private companies with a small number of shareholders, often the same people who run the business day to day. This includes consultants, doctors, legal professionals, engineers and property investors who actively manage their own portfolios.
Under the market salary rule, shareholder-employees in closely held companies must be paid a fair wage for the work they do. At the same time, many business owners try to share income with family members to manage household cash flow and tax. The challenge is doing it in a way that IRD sees as reasonable.
In this article, we’ll look at what counts as a market salary, when it’s acceptable to pay family members and how to stay compliant without missing legitimate tax opportunities.
Why your own pay matters
If you work in your own company, IRD expects your pay to reflect what someone else would reasonably earn in a similar role. Paying yourself too little, or nothing at all, can raise questions about whether your company’s deductions and income allocations are accurate. It’s particularly important for service-based businesses where most of the value comes from your personal work, such as consultants or professionals.
What’s a market salary?
There’s no set formula, but IRD looks for evidence such as:
- Comparable salaries in your industry and region
- Hours you work in the business
- Your experience and responsibilities
- The company’s profitability
Paying yourself a realistic salary not only keeps IRD satisfied, it also strengthens your records if your company wants to borrow money, apply for ACC cover, or prove steady income for a mortgage.
Paying family members: what’s fair and what’s risky
It’s common to pay spouses or family members who genuinely help in the business, but the same principle applies: the pay must be realistic for the work done.
For example:
- A property investor or service professional might pay their partner to manage bookings, handle admin, or assist with accounts – that’s fine but record hours and tasks and make sure the rate matches market pay.
- Paying children or non-working spouses large consulting fees without evidence? That’s likely to attract IRD attention.
IRD can disallow deductions or reallocate income back to you if payments aren’t genuine or market-based.
How to get it right
- Keep clear records such as job descriptions, timesheets and evidence of payments
- Review your salary annually and adjust if profits or your role changes
- Document family payments properly, treating them as real employment or contracting arrangements
Talk to your accountant to help benchmark your salary and structure income in a compliant way.