Employers and independent contractors have the obligation of meeting their Schedular Payments, formerly known as Withholding Payments.
Schedular Payments are made to contractors who perform activities outlined in Schedule 4 of the Income Tax Act 2007. These payments are subject to tax at a flat rate even if the contractor is registered for GST. You will find a list of the activities on the back of the IR330 (Visit ‘Forms and Guides’ on our website).
In general, there are two ‘classes’ of workers for tax purposes: employees, and independent contractors. If you are an employee, your employer will pay you a salary or wage, and deduct PAYE from your payments. If you are an independent contractor, (self-employed) your employer will not deduct PAYE. But, if you do certain jobs, your employer will make Schedular Payments and deduct withholding tax.
Independent Contractors
An independent contractor is self-employed. It is the contractor, not the employer, who generally makes major decisions about how and when the work is done. Sometimes it can be hard deciding if a worker is an employee or an independent contractor. If you are unsure, please call Inland Revenue Department (IRD). There can be serious consequences if a worker is classed incorrectly.
If a contractor does certain jobs, the employer must pay the contractor Scheduler payments, and deduct Withholding Tax at a flat rate. Common examples include agricultural contracting, labour-only contracting in the building industry and commission selling.
From April 1, 2010 Schedular Payments must be deducted from any payment made to any type of contractor (individual, trust, partnership or company) providing work or services for the supply of labour, or mainly for labour on land in connection with fruit crops, orchards, vegetables, or vineyards.
Some exemptions
An employer does not deduct Withholding Tax from withholding payments made to Public, Local or Maori authorities, A New Zealand resident company and a contractor who has a certificate of exemption.
If you hire a company for doing thinning, picking, packing or pruning work in the agricultural, horticultural and viticultural industries, you must deduct Withholding Tax, unless the company has a certificate of exemption.
A contractor who has a good record of filing tax returns and paying tax on time will qualify for a Certificate of Exemption. You can apply for a Certificate online.
Employers’ duty
If you pay your contractor Schedular Payments, you must deduct Withholding Tax, unless the contractor has a Certificate of Exemption, (or is an exempt body).
The rate of Withholding Tax varies according to your work as per the List.
Do not deduct earners’ levy, KiwiSaver deductions, or student loan repayments. The contractor is responsible for these items. If a contractor shows you a Certificate of Exemption, keep a photocopy in your records.
Contractors’ duty
If you are a contractor and you receive Schedular Payments, you must file a tax return every year, and include such payments earned. As a self-employed person, you can claim business-related expenses. When you file your return, IRD will assess you for Income Tax and any student loan obligations and pass the information to ACC Department to enable them to charge you ACC levies based on your business profit.
Incorrect classification
Sometimes an employer may classify a worker incorrectly. The most common mistake is to treat an employee as a self-employed person (and not deduct PAYE). The consequences may be serious. You may have to pay PAYE arrears (dating back to the start of the contract), and penalties. In addition, you may face the risk of the employee taking you to the Employment Court to recover employee benefits such as annual leave, sick leave, and minimum wage entitlements.
Calling a worker an ‘independent contractor’ in a contract is not enough to determine the worker’s status, which is determined after a number of factors are considered.
Please call us if you have any doubts.
Abdul Rafik is Inland Revenue’s Community Compliance Officer based in Auckland. He is happy to answer readers’ queries, which should be sent to venkat@indiannewslink.co.nz
