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Contractor tax changes: How to get it right

All contractors can have tax deducted from their pay at a rate of their choosing, and some MUST now do this. Check if this applies to you — if you get it wrong, you might find your pay packet is 45% lighter than you expect.

Plus we answer your questions about the new tax laws for contractors.

A law change means all contractors can now have tax deducted from their pay at a flat rate of their choosing, if their payer agrees.

Contractors hired by a recruitment agency, or other labour hire business, must have tax deducted from their pay.

If you choose to — or must — have tax deducted from your pay, fill out the new tax rate notification form (IR330C) and give it to your payer. New Zealand tax residents can pick any rate from 10% up to 100%.

Tax rate estimation tool for contractors (external link) — Inland Revenue

Dictionary of tax terms

These are not different types of tax, but different ways of paying income tax. 

Tax type

What it is

PAYE

Stands for pay-as-you-earn and is deducted from an employee’s salary or wages by their employer.

Provisional tax

Income tax paid in instalments throughout the year. 

Schedular payments

Schedular payments are the contractor’s equivalent of salary or wages. Tax is deducted from a contractor’s pay — officially known as schedular payments — by their payer, at a rate the contractor has chosen.

Withholding tax

Old term for “tax on schedular payments”.

Your questions answered

After last month’s newsletter article on tax and contractors, a number of people sent in questions. Here, with the help of Inland Revenue, are the answers.

Do I still pay provisional tax?

It’s up to you. The tax rate you choose to have deducted from your pay will be a factor in whether or not you do.

You only need to pay provisional tax if you’re expecting to have an end-of-year tax bill of more than $2,500.

If tax is deducted from your payments, you can reduce the chance of having an end-of-year tax bill by choosing a tax rate that better fits your circumstances. This could mean you no longer need to pay provisional tax.

If you want to keep paying provisional tax but are now having tax deducted from your payments, you might be able to get a 0% special tax rate — fill out Inland Revenue’s IR23BS form. This would allow you to continue paying tax as you have been before the rules changed.

Special tax code application (IR23BS) (external link) — Inland Revenue

With provisional tax there are a number of factors to consider, eg budgeting for lump-sum instalments, payment due dates, so think carefully about what’s best for you. If you have a tax agent or accountant, it’s a good idea to discuss your options.

Provisional tax (external link) — Inland Revenue

When do I fill out the new tax rate form?

If you choose to have tax deducted from your pay, fill out an IR330C form when you:

  • start a new contract, or
  • want to change the rate at which tax is deducted.

But if you’re a contractor paid through a recruiter, or other labour hire business, you must fill out this form.

Give the completed form to your payer, eg the business that hired you, or your recruitment agency.

If you don’t complete the IR330C, then tax will be deducted at 45%.

Completing an IR330C form (external link) — Inland Revenue

What if I pay too much — or too little — tax?

The same as always. If you pay too much, you’ll get a refund from Inland Revenue.

If you pay too little, you’ll owe money to Inland Revenue and will get a tax bill. If your end-of-year tax bill is more than $2,500, you’ll be expected to pay provisional tax the following year.

Tax refunds (external link) — Inland Revenue
If you have tax to pay (external link) — Inland Revenue

What if I’m paying off tax arrears?

Choosing a higher tax rate will not help clear your debt to Inland Revenue. You’ll need to keep paying those arrears separately to the tax you have deducted from your schedular payments.

Your options during financial difficulty (external link) — Inland Revenue

Does this change how I charge GST for my services?

No. When invoicing, continue to charge GST on your before-tax total. GST is a tax on goods and services paid by the business that hires you. It isn’t a form of income tax.

 

If you are a recruiter, or other labour hire business, must you deduct tax from contractors’ pay?