Tax changes for contractors
Changes to the way schedular payments are taxed have implications for independent contractors, making it important people clearly understand the distinction between someone who is selfemployed and someone who is an employee.
Schedular payments, previously known as withholding payments, are payments made between parties for services where the relationship is not strictly one of employer and employee.
People receiving schedular payments are instead classed as independent contractors.
The first change affecting independent contractors is the introduction of a new tax form for them, known as IR330C.
The second change is that they can now opt for voluntary deductions from their payments if their activity is not listed on the IR330C form. The standard deduction is 20 per cent.
There must be a written agreement between the parties to deduct tax, however. An email is fine for this purpose.
At this point, a word of caution: an employer should make sure the person they are hiring is really an independent contractor. To determine the correct status, the Inland Revenue document IR336, ‘‘Self-employed or an employee?’’, is helpful.
The third change is that a contractor can either choose the standard rate on the IR330C or pick their own rate.
The rate they choose must not be less than 10 per cent but can be higher than the standard rate.
To use a rate lower than 10 per cent, a special tax code must be applied for. The appropriate form for doing this is an IR23BS – Special Tax Code Application.
The fourth change is that the IRD can direct the person hiring the independent contractor to make additional deductions for such things as tax arrears, student loan arrears and non-custodial parent liabilities.
The fifth change is that a labour hire business must deduct withholding tax made to contractors under a labour hire agreement. An example of a labour business would be a firm supplying locum medical specialists to hospitals.
Even if the independent contractor is operating under a company, the labour hire business is still required to deduct tax at the standard rate of 20 per cent.
It is always advised to contact a chartered accountant or financial adviser before making a financial commitment.
For more information, contact Paul Sheehan, chartered accountant, on 03 355 2636.
Chartered accountant Paul Sheehan can help people avoid any misunderstandings in a changing tax system.