Paying contractors or working as a contractor

IRD’s latest update to tax agents includes some clarification around contractors and withholding tax.

There is a misunderstanding that all contractors are now subject to withholding tax. This is not the case. The change is only for contractors hired by a labour hire business.

From 1 April 2017, contractors working for a labour hire business under a labour hire arrangement must have withholding tax deducted from their income.

Activities and examples of a labour hire business
One of the main activities of a labour hire business is arranging for a person to perform work or services directly for:

  • its clients, or
  • clients of another person.

Examples of labour hire businesses are:

  • an on-hire business
  • an employment agency
  • contract management, or
  • recruitment services.

Withholding tax rate
The standard withholding tax rate for this category is 20%. However, a contractor may choose a lower rate (the lowest rate is 10%) when they fill in their Tax rate notification for contractors (IR330C) form.

They can also apply to us for a 0% special tax rate by filling in a Special tax code application (IR23BS) form. We review their tax compliance history before deciding if we’ll issue a 0% rate certificate.

Sub-contractors

Businesses (eg an engineering business) hiring sub-contractors don’t come under the new legislation. The sub-contractors wouldn’t be paid schedular payments so withholding tax isn’t taken out of their payments.

See some examples of what is and is not a labour hire business

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