I've engaged someone as a contractor. What do I actually need to do — withholding tax, schedular payments, IR330C?

What to watch for

Six things that change how the tax-side of a contractor engagement actually works — most of which the relationship between the gateway test, the schedular payments regime, and GST conceals from people who've only thought about classification.

1. The gateway test and the schedular payments test are separate. Both can apply, and they often do. Section 6(7) of the Employment Relations Act is about employment status: is this person an employee or a contractor under employment law. Schedular payments are about tax deduction at source: regardless of employment status, does this payment fall under Schedule 4 of the Income Tax Act, which means you deduct withholding tax at the time of payment.¹ A worker can be a properly-engaged contractor under the gateway test and receive schedular payments — that's actually the most common case for trades, IT contractors, and labour-only services. Don't assume that getting the gateway test right means you've handled the tax side; they're independent tests.

2. No IR330C means you deduct at 45%. Get the form before the first payment. When a contractor receives schedular payments, they give you a completed IR330C with their elected withholding rate. The form lists schedular activities (page 3 of the form) with standard rates — typically 10% to 33% depending on activity. Contractors can elect a rate higher than the standard but no lower than 10% without an IRD-approved tailored tax rate. If they don't give you an IR330C, you must deduct at the no-notification rate of 45% (or 20% for non-resident contractor companies).² This rate is high deliberately — it pressures the contractor to file the form. The trap is treating the form as a "tidy up later" item. Get it before the first payment lands; the alternative is explaining to your contractor why their $5,000 invoice paid out as $2,750.

3. Labour-hire arrangements always trigger schedular payments for resident contractors. No exceptions. If your contractor is engaged via a labour-hire firm — a recruitment agency, IT staffing company, or any business whose primary activity is supplying contractors to other businesses — schedular payments apply automatically for resident contractors, even if the contractor operates through their own company. This was tightened in 2017 specifically to close a loophole where contractors-via-labour-hire-companies were avoiding withholding tax altogether. The labour-hire firm itself is responsible for the deduction in those arrangements; your invoice from them shows the gross less their margin and there's nothing for you to deduct.³ Non-resident contractor arrangements have their own rules; don't treat this as a blanket statement across non-resident engagements.

4. Schedular payments and PAYE are not the same regime. Don't conflate them. PAYE is the regime for employees: weekly or fortnightly payroll, KiwiSaver employer contributions, ACC earner levies, holiday pay, the lot. Schedular payments is the regime for contractors-on-Schedule-4: deduct withholding tax only — no KiwiSaver, no ACC employer levies (the contractor pays ACC directly, billed by ACC), no holiday pay. Both are filed via payday filing through myIR, but they're separate categories on the form. The mistake worth flagging is engaging someone as a contractor and accidentally putting them on PAYE because that's what your payroll software defaults to — that creates retrospective KiwiSaver obligations, ACC reconciliation issues, and conflicting tax filings. If you're in payroll software for the first time setting up a contractor, double-check the worker type before the first payment.

5. GST runs alongside schedular payments. The contractor invoices, you withhold the tax, GST works as normal. A schedular-payments contractor who is GST-registered invoices you the gross fee plus 15% GST. You calculate withholding tax on the GST-exclusive amount — the fee, not the GST. You then pay them: gross fee, less withholding tax, plus GST. The contractor reports the gross fee as income (with the withholding tax credited against their year-end liability) and the GST as output tax in their return. You claim back the GST on your return as input tax. The two regimes don't double-tax; they sit alongside. The trap is calculating withholding on the GST-inclusive amount and over-withholding by a small margin every payment. Most accounting software handles this correctly; spreadsheet-driven contractors are the exposure. See the entries on GST registration and first tax invoice.

6. Misclassification on the gateway test triggers retrospective tax liabilities. Schedular payments don't bridge the gap. If your "contractor" turns out to be an employee under the gateway test or the underlying real-nature-of-the-relationship test, the consequence isn't only employment-side (PAYE backpay, holiday pay backpay, KiwiSaver employer contributions). It's tax-side too: IRD reassesses the relationship retrospectively, the schedular payments deductions you made get treated as PAYE that was under-withheld, and the difference becomes payable plus interest and potential penalties. The schedular payments work didn't bridge the gap; it documented the wrong regime. This is why getting the gateway test right matters more than the schedular payments mechanics — the mechanics are tidy if classification is right. See the entry on contractor classification for the upstream test.

A separate point on what the schedular payments regime actually accomplishes for both sides. For IRD, it solves the "contractor doesn't pay tax until April, by which point they've spent it" problem — collecting at source means the tax flows in steady-state regardless of how the contractor manages their cashflow. For the contractor, withholding at the right rate means their year-end tax bill is mostly already paid; if the elected rate is too high, they get a refund; if too low, they top up. For you as the engager, schedular payments are administrative load — you're acting as a tax collector for IRD on top of running your business. The administrative load is bounded (the IR330C is a one-page form, the deduction goes through payday filing alongside your normal payroll, the contractor handles their own ACC) but it's real, and it's worth costing into the engagement when you're deciding contractor-vs-employee. The PAYE administrative load is heavier; the schedular payments load is lighter; both are real.

Where this entry stops

This entry covers the tax-side mechanics of engaging a contractor — the schedular payments regime, the IR330C, the GST interaction, and how it sits separately from PAYE. It doesn't cover:

• Whether the worker is genuinely a contractor in the first place. See the entry on contractor classification.
• What goes into the contractor agreement itself (terms, restraint, IP assignment). Adjacent to but distinct from this entry.
• GST registration and first-tax-invoice mechanics. See the entries on GST registration and first tax invoice.
• The contractor's own end-of-year tax obligations — IR3 filing, expense claims, provisional tax. That's the contractor's side, not yours.
• Non-resident contractors with double-tax-agreement relief. Specialist territory; pointer-only at v1.

For the procedural detail on filing schedular payments through payday filing, Inland Revenue's schedular payments page and the Employer's Guide IR335 carry the operational specifics.

Last verified 27 May 2026. Full source list: references.