One of the first areas you need to pay attention to, when you start your own business and engage the services of a third party (“TP”), is to determine whether your relationship between you and the TP is one of employer/employee or is the TP is self-employed. This is an important distinction as an employment relationship imposes an obligation on you, the employer, to deduct tax on behalf of the employee and remit to the IRD (either PAYE or Withholding tax/” Schedular payments”). If the TP is classed as self-employed, then the TP is responsible for all tax payments/declarations to the IRD.
On the surface, the characteristics of the employment relationship may seem simple. However, as is the case in most principle based jurisdictions, it is the characteristics or the substance of the relationship that is important. Additionally, the TP may be self-employed with some of the work he/she performs, but considered an employee in other areas. The IRD offer some assistance on the website, in particular IR 336 Self-employed or an employee? http://www.ird.govt.nz/resources/8/f/8f04cd004ba3d516afd6bf9ef8e4b077/ir336-apr09.pdf). A useful summary is contained below:
Characteristics of self-employment
1. The TP controls how the work is done, i.e. TP determines the hours worked, when to take holidays
2. TP invests/takes on the risk of the work done, i.e. TP has invested own funds into the business/can sell the business
3. TP provides all the major assets to perform the work
4. TP does own training
5. TP responsible for getting the work done, i.e. TP can sub-contract the work, TP is free to do work for other people.
Characteristics of employee
1. TP has do the work you instruct them to do, as you say, during the hours you say it at, at any-time you request it.
2. TP is entitled to overtime & penal rates
3. TP has a set amount of hours per week/month
4. TP is prevented from doing work for others, i.e. they can only work for you.
If the TP satisfies most of the self-employment characteristics, as mentioned above, the TP is responsible for their tax filings.
If the TP fit most of the characteristics of an employee, then you, as employer, are required to deduct the appropriate tax and remit this to the IRD. You will need to register as an employer on the IRD website (http://www.ird.govt.nz/online-services/service-name/services-r/online-register-employer.html). To determine the appropriate tax, all employees should fill in the IR 330 Tax Code Declaration http://www.ird.govt.nz/resources/b/f/bf9db1804ba3cfc08a6ebf9ef8e4b077/ir330.pdf). This form runs through two main forms of tax – PAYE (salaries/wages) and WT (independent contractors). Essentially, if you fall into specific categories (listed on page 4 of the IR 330), then you need to pay Withholding Tax (WT) or what is now called Schedular Payments. If the TP does not fit those characteristics, the employee should follow the flow chart to determine the tax code for PAYE (page 2 of IR 330). Ensure you retain the IR 330 in the employee's file.
While the above will seem complicated the first few times, once you get into the flow, it is fairly simple. Furthermore, when you have registered with the IRD, the online prompts guide you through the monthly disclosure and payment requirements. If you are struggling with any of the requirements, contact the IRD on 0800 377 772 (have your business IRD number ready) or your accountant.
Prenelle Rungan
Prenelle is a fully qualified CA and lawyer. She has held senior finance roles with global and local companies over the last 15 years. She is currently a Director of BizSync Limited, a consulting company that strives to start businesses on the right foundations. If you wish to contact her, please visit her website www.bizsync.co.nz/contact.