Whether you are a contractor or an employee has major tax consequences in New Zealand. Employees have PAYE deducted automatically; contractors manage their own tax. But the label on your contract is not the deciding factor — IRD uses a specific test to determine your actual status.
IRD determines contractor vs employee status using a multi-factor test — calling yourself a contractor in a contract does not automatically make you one. Key factors include who controls how the work is done, whether you can subcontract, and whether you bear financial risk. Misclassification (either way) carries serious tax consequences. When in doubt, get a determination from IRD.
Why Status Matters for Tax
| Employee | Contractor | |
|---|---|---|
| Tax deduction | Employer deducts PAYE | You manage your own tax |
| Provisional tax | Not required (employer handles) | Required if RIT > $5,000 |
| GST | Not applicable | Required if turnover > $60,000 |
| ACC work levy | Employer pays (work levy) | You pay your own work levy |
| KiwiSaver | Employer contributes 3% | Voluntary only |
| Expense deductions | Very limited | Broad business expenses claimable |
| IR form | Employer provides income summary | You file an IR3 |
The IRD Status Test
IRD uses a combination of tests drawn from case law. No single factor is decisive — the overall picture matters.
Control Test
Employee: The person paying you controls not just what you do, but how and when you do it. Contractor: You have significant autonomy over how, when, and where the work is done.
Example: If a client tells you to work 9–5 in their office using their systems, that points toward employee. If you set your own hours and work from your own premises, that points toward contractor.
Integration Test
Employee: Your work is integral to the business — you would be missed structurally if you left. Contractor: Your work is accessory to the business — you provide a specific service and could be replaced by another supplier.
Fundamental/Economic Reality Test
Employee: You are economically dependent on one employer — no chance of profit or loss, tools provided, no investment in the business. Contractor: You bear real economic risk — you can make a profit or a loss, you supply your own tools, you can choose to work for multiple clients.
Specific Indicia
| Factor | Points to employee | Points to contractor |
|---|---|---|
| Tools and equipment | Provided by client | Your own |
| Ability to subcontract | No | Yes |
| Multiple clients | No | Yes |
| Hours | Set by client | Your own |
| Method of payment | Regular salary/wages | Invoices per project |
| Leave entitlements | Provided | None |
| Business registration | None | Registered business name / GST registered |
Schedular Payments
Some contractor payments are subject to schedular withholding — where the client deducts withholding tax before paying you, similar to PAYE. This applies to specific activities listed in Schedule 4 of the Income Tax Act, including:
- Labour-only building contracts
- Cleaning services
- Modelling
- Entertainment (DJs, musicians, comedians)
- Advertising
- Certain agricultural contracts
The standard withholding rate is 20% (or 15% for non-resident contractors). If you have a tax agent or your actual rate should be different, you can apply to IRD for a lower rate using the IR23BS form.
If schedular payments apply, your client must:
- Withhold the correct amount
- Pay it to IRD
- Provide you with an annual summary
You still file an IR3 and declare the gross income. The withholding is treated as a tax credit.
For activities not on Schedule 4, you invoice for the full amount and manage your own provisional tax.
Misclassification Risks
If you are an employee but treated as a contractor:
- You miss out on KiwiSaver employer contributions, holiday pay, and sick leave
- The employer avoids PAYE and employer ACC levies
- IRD can reclassify the arrangement and bill the employer for unpaid PAYE plus penalties and interest
- Employees can raise a claim with the Employment Relations Authority
If you are a contractor but taxed as an employee:
- You lose the right to deduct business expenses
- You cannot claim GST back
- You may be overpaying tax if expenses are significant
Applying for an IRD Status Determination
If you or your client are unsure about your status, you can apply to IRD for a written determination. IRD will review the arrangement and issue a ruling. This provides certainty and protection if the ruling is followed accurately.
Apply via myIR or by writing to IRD. Include:
- A copy of your contract or working arrangement description
- Information on tools, hours, control, and ability to subcontract
Frequently Asked Questions
Can a contract say I’m a contractor but IRD treat me as an employee?
Yes. The label in the contract is not binding on IRD. IRD looks at the actual working arrangement. Numerous Employment Relations Authority decisions have held that people described as contractors in contracts were in fact employees under NZ law.
Does contractor status affect my ACC levies?
Yes significantly. Employees’ workplace accident levies are paid by the employer. Contractors pay both an earner levy (same as employees, through their IR3) and a work levy directly to ACC based on their industry. The work levy can be substantial in high-risk industries.
I’m a contractor. Can I deduct expenses that employees can’t?
Yes. Contractors can deduct all expenses that are incurred wholly or partly in earning their income — home office, vehicle, equipment, software, professional development, accounting fees. Employees have very limited expense deduction rights.
What’s the difference between a schedule 4 activity and other contracting?
For Schedule 4 activities, your client withholds tax before paying you. For other contracting, you receive the full invoice amount and manage your own provisional tax. Schedule 4 withholding is a compliance mechanism, not a different tax rate — you still file an IR3 and claim the withheld amount as a credit.