Employees and self-employed contractors
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...
- do the work themselves, rather than hiring someone else to do it for them
- can be told at any time what to do on the job, or when and how to do it
- are paid at a set rate (for example, hourly weekly, monthly, or per unit of production)
- can get overtime pay or penal rates
- work set hours, or a given number of hours a week or month
- have someone else who sets the standards for the amount and quality of their sales or output
- work at the premises of the person they are working for, or somewhere that person decides
- do the same sort of job as other people who are treated as employees
- are under an employment contract, or any law that says how their relationship with their "employer" should be run
- are prevented from doing work for anyone else
- have to follow the rules or procedures of the person they are working for.
- decide or control how they do the work - see the examples below
- invest or risk their own money in the activity in any way - see the examples below
- provide the major assets or working equipment needed for the job (not just small tools, work clothing and/or vehicle to get to and from work)
- provide or pay for their own training
- are responsible for getting the work done - see the examples below
|If you employ ...
- register as an employer, and
- deduct PAYE at the rate indicated in the IR340 or IR341.
|How to register as an employer
|a self-employed contractor performing duties listed in the PAYE deduction tables (IR340) and (IR341)
- register as an employer, and
- deduct tax at the withholding rate indicated in the IR340 or 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
||then they, for example...
|decide or control how they do the work
- decide when they take their holidays
- decide when, where and what hours they work
- decide the standard or quality of work
- decide how much they get paid and how.
|invest or risk their own money in the activity
- could sell the business
- could support the business with their own money, for example lend it money or provide some working capital (excluding shares obtained from any employee share scheme)
- are responsible for losses or their own bad management
- are responsible for management and investment decisions for the business.
|are responsible for getting the work done
- can get other people to work with or for them, without needing to get permission from anyone else
- pay these people from their own funds
- are free to work for other people
- advertise their own account
- can't do the job (for example they are sick) they organise a replacement
- their contract says they'll be penalised in some way if they stopped work, or left without completing a particular project
- must correct unsatisfactory work in their own time and at their own expense.
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.
Download our Independent contractors - Getting it right (IR963) guide