What you need to know as an Employer
As an employer, you may have employees or contractors working for you, or a combination of both. You need to be clear on the differences between them, your obligations in relation to each, and the tax treatment for each.
If you have just started to employ staff:
When you start employing staff, you need to register with Inland Revenue as an employer. However, if your worker invoices you for the work — with GST (if they are registered for GST) — then you won’t be required to register as an employer and account for PAYE. This means you pay them as a contractor rather than an employee.
However, you need to be sure that your worker is a contractor and the relationship with your worker can withstand the employee versus independent contractor test. If you ignore this and Inland Revenue decide later on that this person really is an employee, you will be liable for any unpaid PAYE. You may also incur other costs such as unpaid holiday pay and sick leave, should an employment issue arise.
How to tell the difference between an Employee and a Contractor
Every working relationship needs to be considered on its own facts, but a person will probably be treated as an employee if they have to do the work themselves, cannot employ someone else to do it, work set hours, have to work as directed, are not truly in control of their own business, have to follow the rules as set by the employer and work on the employer’s premises.
A contractor is not an employee
A useful tip from Thank You Payroll is:
Contractors fall under General Civil Law and do not have minimum employment rights like employees do. It is therefore important to be especially clear about agreements for service, so you do not misclassify an employee as a contractor. This can be a costly mistake, as you could be liable for leave, minimum wage, and public holiday pay owing – among other things.
Contractors are usually not paid through payroll (as payroll pays your employees). Their invoices are seen as a business expense and paid by the finance department, similar to your electricity bill or other expenses. If you do want to pay a contractor through Thankyou Payroll, they have to be on the Withholding Tax (WT) tax code.
Tax treatments for Employees and Contractors
Understand the tax treatment for your employees and contractors and make sure your systems are set up for each correctly.
Download this free guide from MBIE that explains the differences, provides key tests you can apply to determine the difference, and shows rights and obligations related to employees and contractors.
If you’d like an easy reference to tax treatments for employees and contractors, here is one here.
