Full source list for I've engaged someone as a contractor. What do I actually need to do — withholding tax, schedular payments, IR330C?
Six numbered references for /wayfinder/refs/engaging-a-contractor-tax-side:
1. Schedular payments are defined under section RD 8 of the Income Tax Act 2007, which incorporates Schedule 4 of the Act. Schedule 4 lists the activities and standard tax rates that apply. The schedular payments regime is independent of the employment-status test in section 6 of the Employment Relations Act 2000; a worker can be a contractor under the ERA gateway test and still receive schedular payments.
2. No-notification withholding rate: when a contractor does not provide a completed IR330C, the payer must deduct at 45% (or 20% for non-resident contractor companies). The minimum elected rate on the IR330C is 10% (15% for non-residents and contractors on temporary work visas), unless the contractor obtains an IRD-approved tailored tax rate.
3. Labour-hire firm rules: from 1 April 2017, payments made by labour-hire firms to resident contractors became automatically subject to schedular payments rules, regardless of whether the contractor operates through a company. The change closed a loophole where contractors operating through companies via labour-hire firms had been avoiding withholding tax. Resident labour-hire contractors cannot obtain certificates of exemption.
4. Schedular payments and PAYE are separate regimes under the Income Tax Act 2007 and the Tax Administration Act 1994. Schedular payments use tax code WT and are filed via payday filing alongside PAYE but as a separate category. KiwiSaver employer contributions, ACC employer levies, and holiday pay obligations apply to PAYE employment only; schedular payments contractors are responsible for their own ACC levies (billed directly to the contractor by ACC) and have no KiwiSaver employer obligations.
5. GST and schedular payments interaction: the schedular payments withholding tax is calculated on the GST-exclusive amount of the contractor's invoice. The GST is calculated and paid separately under the GST Act 1985. The two taxes do not interact; the contractor reports the gross fee as income (with withholding tax credited at year-end) and reports the GST as output tax in their GST return.
6. Misclassification consequences: if a person engaged as a contractor is reclassified as an employee (under either the gateway test in section 6(7) of the ERA or, if the gateway is not satisfied, the real-nature-of-the-relationship test), the tax-side consequence includes retrospective reassessment of payments as PAYE, with the difference between the schedular payments withheld and the PAYE that should have been withheld becoming payable. ACC employer levies, KiwiSaver employer contributions, and holiday pay obligations also apply retrospectively. Penalties and interest can apply. See the entry on contractor classification for the upstream test.