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It is a common (and some would say wise) practice for small businesses to hire contractors when specialised skills are required for a short, rather than a long time.

However the New Zealand tax rules are different for Australia, particularly for medium term projects where the question can arise as to whether the individual is a contractor or, instead, a short-term employee.

This is important because the obligation is on the employer. If IRD subsequently determine that a “contractor” was in fact an “employee”, they can assess the employer for the PAYE that should have been deducted. If the problem dates back months or even years (as is most likely) the cost can be significant. Kiwisaver can also come into play.

Inland Revenue is taking a new look at this area and dishing out penalties where they find small businesses have got it wrong. Ignorance is no excuse.

There are important rules separating contractors from normal employees, particularly with regard to tax and accident compensation. Get it wrong and the problems start.

So, what are the key differences between contractors and employees?

Contractors work for themselves, that is to say they are their own boss. For instance:

  • they own their business – including the major tools, assets and facilities required to deliver services. Contractors can perform work for anyone they wish. Their clients, your competitors, whoever. They may also accept or decline jobs at their own discretion.
  • contractors control the jobs at hand – deciding when, where and how to perform them, subject to prices agreed with their customers.
  • they are responsible for delivering expected outcomes to clients – by supplying and applying the necessary resources (time, skills, tools, manpower and credentials). Contractors may be penalised financially (e.g. non-payment or litigation) for shortcomings or failure.

Employees, on the other hand, report directly to a “boss” as they are in a master-servant relationship in the workplace.

  • they have set hours, fixed rates of pay, standard leave entitlements and may normally not work elsewhere while employed.
  • facilities, training and tools are provided to employees.
  • employees work under direct control of their principals and may not refuse reasonable workplace requests.
  • they may normally not be sued or penalised financially for non-performance, internal disciplinary measures apply instead.

How should contractors be administered in my business?

  • contractors must be excluded from your Employer Schedule
  • if you make schedular payments to contractors, it is your duty to deduct withholding tax from payments. As from 1 April 2017, contractors may elect their own withholding tax rates for you to use. They’ll give you an IR330C form.
  • for payments to contractors that are not schedular, no tax is to be deducted.

No sure? Then give us a call on 1300 791 600. We’ll see you right.

The information in this article is indicative only, not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.