There’s often confusion among business owners around what it means to be an employer versus using contractors to run a business. So what defines a contractor? And how is this different to an employee?
Right, so here's the basics:
What is an independent contractor?
Independent contractors are self-employed people who control what work they do and how it's done and are responsible for their own tax payments.
1. They decide or control how they do the work
- They decide when they take their holidays
- Decide when, where and what hours they work
- Decide the standard or quality of work
- Decide how much they get paid and how
2. They invest or risk their own money in the activity
- Could sell the business
- Could support the business with their own money
- Are responsible for losses or their own bad management
- Are responsible for management and investment decisions for the business.
3. They are responsible for getting the work done
- Can get other people to work with or for them, without needing permission from others
- Pay those people from their own funds
- Are free to work for other people
- Advertise their own account
- If they can’t do the job (e.g. sick) then they will organise a replacement
- Their contract says they’ll be penalised in some way if they stopped work, or left without completing a particular project
- Must correct unsatisfactory work in their own time at their own expense.
How is this different to an employee?
An employee:
- Does the work themselves, rather than hiring someone else to do it for them
- Can be told at any time what to do on the job, or when and how to do it
- Is paid at a set rate (for example, hourly weekly, monthly, or per unit of production)
- Can get overtime pay or penal rates
- Works set hours, or a given number of hours a week or month
- Has someone else who sets the standards for the amount and quality of their sales or output
- Works at the premises of the person they are working for, or somewhere that person decides
- Does the same sort of job as other people who are treated as employees
- Is under an employment contract, or any law that says how their relationship with their "employer" should be run
- Is prevented from doing work for anyone else
- Has to follow the rules or procedures of the person they are working for.
There are some employment or contract situations where the lines are blurred between employee and contractor. Inland Revenue publishes guidelines in this area so talk to us at RightWay or contact the IRD directly.
Your responsibility when using contractors
Your self-employed contractors are responsible for their own tax so you don’t usually have to worry about PAYE and other deductions. However, in circumstances (usually depending on the industry and whether the contractor is a company) you are required to deduct ‘tax on schedular payments’ from payments to contractors and pay these amounts to Inland Revenue unless they hold a Certificate of Exemption.
Self-employed contractors are not covered by the Employment Relations Act (2000) or the Holidays Act (2003), which deals with annual leave, public holidays, sick leave or bereavement leave. They are however protected by the terms of their signed contract – meaning you can still be legally liable if you break the terms of any of the contracts signed.
This area can sometimes be confusing, so if you’re still not sure where your situation fits in, or if you have any other questions then please get in touch with us.
There’s often confusion among business owners around what it means to be an employer versus using contractors to run a business. So what defines a contractor? And how is this different to an employee?