There is no doubt that using a contractor over an employee can be attractive. We are often asked about the tax requirements for contractors.
In some cases you will need to deduct a flat rate of tax when using a self-employed contractor, even if that contractor is registered for GST. This is commonly called withholding tax but the correct title is “tax on schedular payments”. It gets the name “schedular” as certain occupations appear in Schedule 4 of the Income Tax Act 2007.
Some of the schedular payments include:
- commission paid to insurance agents or salespersons
company directors’ fees
payments for most forms of agricultural, horticultural and forestry work (even if they are a company)
payments for non-residential cleaning, gardening, vermin or weed destruction
payments for the supply of labour to building projects
certain payments made in the media production industry including media contribution fees
payments to photographers, journalists, writers and artists
fees for persons exhibiting or demonstrating goods
payments for modelling
contract payments to non-resident contractors
Please note that this list isn’t exhaustive, and can be subject to change.
You can look up all the rates and the list of occupations by checking page 4 of the IR330C form on the IRD website. You can get to that form by clicking here.
If you are still unsure whether or not you should be withholding tax, ring the IRD for clarification.
A contractor must complete an IR330C form. If they don’t, a higher rate of tax may need to be deducted.
You will see that the tax rate differs depending on the occupation of the self-employed contractor.
The deduction will also need to be reported on the Employer Monthly Schedule that you file with IRD. This is the document that has all your PAYE information in it. You use the WT code to identify it as a deduction from a self employed contractor.
The good news is that the contractor is solely responsible for their ACC levies and student loan repayments.
If you are a contractor reading this article, you may be able to:
- have a special tax rate agreed by the IRD. To do this, download the form here.
- apply for a certificate of exemption. This is where IRD agrees that you don’t have to have any tax deducted. You can access that form here. Your employer has the right to contact IRD to ensure that the certificate is valid.
Changes for the 2018 Income Year
Sole Traders using Labour Hire Services
If you are a sole trader, and you are invoicing a ‘middle-man’ like a recruitment or IT services company, that company will be required to deduct 45% of your income before paying you. That’s quite a lot. It will certainly cover any tax you owe, as the top personal tax rate is only 33%. Once you have deducted business expenses, there will be a sizeable refund, but you’ll have to wait until the end of the financial year for that.
The good news is that you can reduce the amount of tax being deducted, down to a minimum amount of 10%. You need to complete the IR330C form, which you can see here. Bear in mind that if you choose 10%, you will probably have tax to pay at the end of the year. It means that you are deferring your tax until later.
IRD have put together a really useful tool to help you estimate your required rate of tax throughout the year. You can access that by clicking here.
This change took effect from 1 April, 2017. It will impact work performed in March, 2017 as this would have been paid to you in April.
Companies using Labour Hire Services
Companies are more complicated. The same rule applies, and so if your company does nothing, the recruitment or IT services firm will deduct 45%. Depending on the way you pay yourself, you will still need to pay provisional tax on your drawings, or PAYE on a salary. That’s an awful lot of tax.
Fortunately companies can apply to reduce their withholding tax rate right down to zero. Again, you’ll need to apply for this by filling out an IR23BS form, which you can access here.
Alternatively, if the company only employees the sole shareholder or director, you could choose to contract directly with the recruitment or IT services firm for your main gig(s), and use the company to invoice any smaller jobs you may do that aren’t sourced through the recruitment or IT services firm.
What if the contractor is GST registered?
If the contractor is registered for GST, they will charge GST on the goods and services supplied. This means their gross earnings will increase by the GST charged. So the amount of tax deducted is based on the GST inclusive figure.
A while back we looked at the issues around contractors and employees from a tax and legal perspective. You can read that article by clicking here.
This article is general in its application and individual circumstances may differ. If you want advice on your own tax affairs, you should always contact a professional. We would be delighted to help so don’t hesitate to contact us.
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