Employees or contractors?

The issue of contractors versus employees is an ongoing issue that has been covered before in Under Construction – with the summer rush fast approaching, it’s one that is worth revisiting   

When hiring a new team member, remuneration options are often an afterthought. Both salary and withholding tax payments have their pros and cons, but simply choosing based on what works better for you and your business is a relic of the past. It is important to understand the details behind each ‘type’ of worker.

Employees

Employees have Pay As You Earn (PAYE) tax, which includes any ACC levies, student loan, KiwiSaver or other superannuation payments (all where applicable) deducted from each salary payment. This means that unless they have other income in their name, their core taxes are paid on their behalf by their employers. The onus for these payments is on the employer, and any non-compliance with the law regarding these is a matter settled between the employer and the IRD. Tax returns can be filed with the IRD by way of Personal Tax Summaries.

Employees are also fully entitled to holiday pay and sick leave payments from their employer. This is by far the simplest approach to personal income tax for a worker, but is more complicated for the employer.

Contractors

Conversely, if you hire someone as a contractor, the task of complying with New Zealand Tax Law is more arduous for the worker, while it’s simpler for you.

Labour-only building contractors have 20% withholding tax, withheld by the payer and administered at the same time as PAYE, but are still required to file an income tax return each year and pay any additional tax (based on their marginal tax rates). Most other contractors do not have withholding tax withheld, but may be required to make provisional tax payments throughout the year.

They are also able to claim certain expenses against their income, such as travel necessary for work, or, in a builder’s case, expenses for repairs and maintenance on any tools they use in the course of their work, along with depreciation on tools and vehicles.

Contractors are required to be GST registered if they earn over $60,000 in a 12-month period, and must file a full income tax return at the end of the financial year. Contractors are not entitled to sick leave or holiday
pay, and are not able to take up personal grievance claims against the employer.

How do I tell the difference?
As shown above, there are definite advantages and drawbacks to each party in each situation. However, the decision to hire someone as a contractor or an employee does not rest simply on what works best for your business!

The best method to decide how to treat your worker for tax purposes is to consider the following areas:

Do they have the ability to work for another employer on another job while working for you?
If they do, then they would fall under the contracting realm of employment.

Who dictates the amount to be paid to the worker?
If the worker is planning on invoicing based on an hourly rate that they have offered to the employer, they would be deemed a contractor. However, if the worker is paid a set rate based on the employer’s discretion, they would be viewed as an employee.

Can the worker take holidays as they wish, or is it up to the employer’s discretion?
If holiday periods are dictated by the employer, then the worker is likely to be deemed as an employee.

Do they supply their own tools for work?
If they supply the majority of their own tools, which are not paid for by the employer via any tool allowance contribution, or are expected to provide their own tools, then they would likely be deemed a contractor. An employee would not be expected to provide their own tools.

Does the worker invoice the employer for hours completed on jobs?
If so, they are a contractor. Employees are paid a rate based on a full day of availability for work, whether the work is there or not. Contractors only get paid based on the hours they work.

These are just a few examples of areas that the IRD look at. And as you read through the above methods, it is easy to see why it has become a grey area for businesses.

In certain situations, it may be that a worker meets some of the tests for being an employee, while also meeting some of the criteria for being a contractor.

What is important is that all reasons for the treatment of a worker are documented, with a rigorous process being followed to determine their nature. Essentially, the less control a business has over a worker and their activities, the more likely they are to be deemed a contractor.

If you have questions about how you should be paying your workers, or have any other questions regarding contractors or employees, please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz; or your local Crowe Horwath advisor.

For the contact details of your local office, please visit: crowehorwath.co.nz/locations or phone 0800 494 569.