Employee or a self-employed contractor?

by The Findlaw Team

Determining whether someone is an employee or a self-employed contractor (independent contractor) is crucial to ensure proper tax compliance.

Depending on whether a person is an employee engaged in a “contract of service” or an independent contractor engaged in a “contract for services” will mean significantly different tax responsibilities. An employee will have their income tax deducted at source by the employer through the PAYE system. An independent contractor will be responsible for paying their own income tax, account for their ACC payments, and may need to register for GST. An independent contractor can deduct certain expenses which they have incurred while deriving their assessable income. An employee cannot deduct such expenses.

How to determine whether a person is an employee or a self-employed contractor

The Supreme Court has said that what must be looked at is the “real nature of the relationship” to decide whether someone is an employee or an independent contractor.

Sometimes a contract may suggest that a person is an independent contractor however, that in itself will not usually be enough.

An answer to following questions will help to determine the real relationship between the parties:
  • What was the intention of the parties? - This requires an analysis of the agreement to determine the parties’ intentions and what they believe the relationship to be.
  • What degree of control does the employer/principal has over both the work that is being done and the way that work is being done?
  • How much independence does the person have?
  • What is the economic reality? For example, is the person performing the services doing so as a person in business or on their own account?
  • Is the person carrying out services that are part and parcel of the particular organisation?

Indicators that a person is an employee

There are a number of indicators that will point to a person being an employee engaged in a “contract of service” for example they:
  • Are trained, directed and supervised on the job.
  • Are paid at a set rate and may be paid for any overtime.
  • Cannot work for someone else.
  • Must comply with the workplace processes.
  • Do something similar to other people in the organisation who are treated as employees.
  • Rely on the employer to have the appropriate insurance cover in case of any negligence on their part.
  • Rely on the employer to provide their tools and things they need to do the job.
  • Have any travel or business related expenses paid for by the employer.
  • Must terminate their agreement only in accordance with the terms of the agreement itself and the Employment Relations Act 2000.

Indicators that a person is an independent contractor

There are also a number of indicators that a person is an independent contractor engaged in a “contract for service” for example they may:
  • Set their own working hours and determine how (and to what standard) the work is done.
  • Have little or no direct supervision or training.
  • Have their own insurance cover.
  • Invest or put at risk their own money.
  • Supply their own tools to do the job.
  • Have a number of clients at any one time.
  • Have others working for them.
  • Lose their job if there is a breach of the contract.

 

Need Help?

If you or someone you know needs legal advice regarding whether you are an employee or a self-employed contractor for tax purposes you can find a lawyer in your area who specialises in this area of law using the FindLaw directory.


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