Employee versus Independent Contractor

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 account for PAYE for that worker. 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.

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.

Understand the tax treatment for your employees and contractors and make sure your systems are set up for each correctly.

For more details, download the GUIDE TO TAX TREATMENT FOR EMPLOYEES AND CONTRACTORS