If you do not wish to register as an employer and account for PAYE, or you wish to engage an individual under the status of independent contractor, rather than employee, the only option is for your worker to invoice you.
However, you should be mindful of the independent contractor vs. employee rules and ensure that these rules are met.
The issue of whether a worker is an independent contractor or an employee normally arises either when there is an employment dispute or when deciding tax status.
Only an employee is entitled to bring a personal grievance under the Employment Relations Act 2000. The courts have ruled that tax status follows employment status.
The Inland Revenue and the courts have developed a series of tests for distinguishing between the two.
- Has the employer the right to control the way the work is performed? For example:
- When holidays are taken
- When, where and what hours are worked
- The standard or quality of work
- How much is paid and how
- Is the type of work or the way it is done the same as work performed by other staff who are employees?
- Is the work an integral part of the employer’s business?
- Does the worker supply all the necessary tools?
- Does he or she work from home?
- Is he or she free to work for other people as well?
- Does he or she pay for training?
- Does he or she advertise on his/her own account?
- Does a written contract exist, and what is the nature of that contract?
- What is the conduct of the parties?
- How are the payments for the work made?
- Is the worker carrying out the same activities as other self employed persons (or employees)?
- Why is the worker being treated as self employed?
- Is the worker genuinely in business on his or her own account?
- Could he or she sell the business?
- Has the worker contributed any working capital to the business?
- Is the worker responsible for any losses or bad management?
- Is the worker responsible for investment decisions for the business?
Other matters the courts will take in to account
- Contractors are not paid holiday or sick leave, and they are usually responsible for their own ACC premiums
- Contractors are not usually provided with fringe benefits such as company cars and health insurance
- Contractors are usually registered for GST and provide their own tax invoices
- A contractor may employ staff or sub-contract work
- A contractor is able to work for more than one person
- A written contract for services should exist
- The Courts and the Inland Revenue will consider the intention of the parties and their actions, rather than just the written contract
If the Department investigates the person claiming to be an independent contractor, the onus of proof and the possibility of penalties is as much on the hirer as it is on the contractor.
The IRD is ever vigilant against attempts to avoid the PAYE system. This is because of the favorable tax treatment that self-employed taxpayers receive due to tax deductions for business expenses, not to mention the cash flow advantages.
Contracting through a Company will not necessarily prevent IRD from overturning a decision to treat a worker as an independent contractor. If the IRD considers the arrangement is a sham, the contractor will be treated as being in the PAYE system. Payers will then be faced with a PAYE bill on the grossed up salary, penalties and even possible prosecution.