Becoming an employer: Who is an employee or a contractor?
For tax and accident compensation purposes, you must decide whether the people who work for you are employees or self-employed contractors. It is important to note that a person can be self-employed in one line of work and still work for someone else as an employee. Read the table below to help you decide.
|Generally they are...||if they, for example...|
|If you employ ...||then you...||See...|
||How to register as an employer|
|a self-employed contractor performing duties listed in the PAYE deduction tables (IR340) and (IR341)||
|a self-employed contractor performing duties not listed in the IR340 or IR341||don't need to deduct tax.|
Examples of self-employed work
|If they...||then they, for example...|
|decide or control how they do the work||
|invest or risk their own money in the activity||
|are responsible for getting the work done||
Independent contractors are self-employed people who control what work they do and how it's done.
Hiring self-employed contractors
They aren't employees so don't have PAYE tax deducted from their income, although some earnings may be subject to tax on schedular payments.
Independent contractors are responsible for meeting their own tax obligations.
Getting it right
Make sure that you're hiring a contractor and not a temporary employee.
Don't include any contractors in your employer schedule.
Include the contractor's fees in your business accounts as a cost.
If the contractor isn't a New Zealand or Australian citizen make sure they have a permit to work in New Zealand.
If the contractor needs to be registered to do their work, eg an electrician, make sure their registration hasn't expired.
Being a self-employed contractor
If you're a self-employed contractor you aren't an employee so you don't have to have PAYE tax deducted from your income, although some earnings may be subject to tax on schedular payments.
If you are an independent contractor you're responsible for meeting your own tax obligations.
Some of the mistakes independent contractors make
- Not filing their IR3 income tax returns on time.
- Not declaring all their contract income on their IR3 income tax returns.
- Not being registered for GST if their turnover is more than $60,000 per year.
- Not accounting for GST on their income when required.
- Claiming private expenditure against their income.
- Incorrect splitting of their income with their spouse.
Getting it right
Get a copy of the filing and payment calendar so you can be sure you have everything done on time.
Check what your tax obligations are for GST, income tax and provisional tax. A tax agent or accountant can help you with this.
If you have a mistake in your return, get in touch with us and we'll help you get it right.
If you need help calculating your annual income, the business or agency you have worked for will be able to confirm your income details.
What we are doing
- Identifying the industries and professions where independent contractors are likely to be employed, and reviewing compliance levels.
- Using tax records from businesses and recruitment agencies employing contractors to identify non-compliance, and taking any corrective action required.
- Inviting independent contractors who may have filed incomplete or incorrect tax returns to make voluntary disclosures.
Date published: 14 Apr 2014