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Employee or Independent Contractor?

A taxpayer's tax obligations differ according to his or her employment status, so it is important to know if he or she is an employee or not. The employment status of a person has the following consequences for tax purposes:  
  • Payments to employees from their employer are salary or wages, which must have PAYE deducted at source.

  • Employees cannot register for or charge GST for services they supply as employees.

  • Independent Contractors:

  • i)   May deduct certain expenses incurred in deriving assessable income;   
    ii)   Must account to the Inland Revenue for tax and ACC earner and employee premiums for themselves and any employees; and 
    iii)             Must meet all the requirements of the Goods & Services Tax Act 1985 if the services they supply are in the course of a taxable activity, and they are registered (or liable to register) for GST. 
      

It is not possible for taxpayers to alter their employment status (or the resulting tax implications) merely by calling themselves independent contractors when they are essentially still employees. 

A person's employment status depends on whether his or her employment contract is a "contract of service" or a "contract for services" Employees have a "contract of service" with their employer. 

Contracts of service evolved from the earlier concept of a master-servant relationship. Such a relationship required an employee to be continuously available for service and to accept a high degree of control by the employer.  

A "contract for services" applies to the relationship between an independent contractor and a principal. It emphasises the nature of the services to be provided by a person rather than his or her availability to work as directed. 

Either form of contract may include an unwritten agreement. A written contract is not necessary in determining the existence of any particular type of employment relationship. However, if there is a detailed written contract, it will form the basis for analysing the nature of the relationship the parties intended to have. Employment contracts often change as the relationship evolves (e.g. A person takes on more duties). Changes in regulations and work practices may also cause the employment status of some workers to change. The courts will consider how the parties actually work together when they determine the type of employment relationship the parties have. 

Tax law relies on the terms "contract of service" and "contract for Services", but does not define them.  

A person will have the same employment status for tax purposes as he or she has under the general law. Sometimes it is not easy to tell if a taxpayer is an employee or an independent contractor. Inland Revenue will use the current common law test to determine a worker's status. 

It is essential to determine the correct employment status. The employer has an obligation to deduct PAYE where the worker is considered an employee. In certain cases withholding tax is also required to be deducted where the worker is determined to be a contractor. 


Disclaimer: The content of this article is intended for general information only and issued to readers as a guide and for their private information. Nick Hoogeveen & Associates website articles do not constitute advice and readers should not act solely on the basis of the material contained within this article. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas. 

June 2016