Rock your payroll the right way

As an employer it’s important you pay your payroll deductions correctly, especially where the line between employee and contractor may be blurred, which is common in the construction industry. Here’s some useful advice to help see you right come the end of the next financial year 

Remuneration options are often an afterthought when hiring new staff. PAYE and withholding tax arrangements have different pros and cons, although employers can no longer choose which option best suits their business. The issue of contractors vs employees is currently a hot button with the IRD and there are serious consequences if you get it wrong.

Defining an employee

Employees have Pay As You Earn (PAYE) tax, which includes any ACC levies, student loan repayments and KiwiSaver or other superannuation payments (all where applicable) deducted from each payment, which means unless they have any other income in their own name, their core taxes are settled by their employer. Any non-compliance with the law is a matter settled between the employer and the IRD. Employees are fully entitled to holiday pay and sick leave payments from their employer.

Defining a contractor

Contractors are initially taxed at a lower rate (the default rate is 20%), with tax, known as schedular payments, being deducted from their income by the payer. At the end of the year, an income tax return must be filed by the contractor and the contractor will either have further income tax to pay (up to a rate of 33% depending on their level of income) or receive a tax refund. They are 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.

Contractors are required to be GST-registered if they earn over $60,000 in a 12-month period. Contractors are not entitled to sick leave or holiday pay, and are unable to take up personal grievance claims against the business.

While there are advantages and disadvantages to each situation, the decision does not rest simply on what works best for your business.

What is the best way to tell how I should treat my worker for tax purposes?

The best way to decide how you should treat your workers for tax purposes is to consider the following:

• Does the worker 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, then 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 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 many businesses.

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

While contractors should supply their own tools, employees would not be expected to do so

More Information

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