Self-employed vs employed

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Forums › Finance and wealth management › Self-employed vs employed - tax status

Lizard1977

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#253208 1-Aug-2019 08:14

I'm going to give the IRD a call re: this question, but thought it could be useful to see what GZer's think.

I'm helping someone to work out whether they are "self-employed" or "employed" for tax purposes. This person doesn't particularly care which way it goes. IRD have a pamphlet IR336 which provides some guidance as to whether a person is "self employed" or "employed." Based on the answers, the situation I'm researching would probably come out "employed." But what would be the consequence if they designated themselves as "self-employed"?

The way I see it, if they are self-employed they would invoice their client for the work they do (and it's between them and their client how much, and on what basis they bill for their work), and it's up to the self-employed person to sort out their own tax. In this scenario, they would set aside the anticipated income tax, ACC earner levy, and student loan repayments, and then file an IR3 at the end of the tax year in 2020. In this particular case, it should be reasonably straightforward, for some short-term contract work. But using the guidance material from IRD they probably are more correctly classed as an employee. Is there a consequence for acting as a self-employed person when they should be treated as an employee?

floydbloke

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#2286919 1-Aug-2019 08:21

If they are going to be self-employed I recommend they hire an accountant to do their returns. In addition, if self-employed and they will be 'earning' more than $60,000 they need to register for GST (and collect/pay it).

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Lizard1977

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#2286920 1-Aug-2019 08:27

Thanks for that. The intention is that it would be short term (less than 3 months), and would be far less than $60k, so registering for GST is unlikely to be necessary.

sen8or

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#2286921 1-Aug-2019 08:33

To what extent does the employer have power over their work -

Do they dictate the how, when and where the work is conducted?

Does the person provide their own "tools of the trade" or are these provided by the employer

Is the person able to perform similar work for other employers at the same time (or after?)

These are the relevant things needed to work through to work out tax status.

There was a change in the tax law recently about contractors and a need for employers to withhold resident withholding tax from payments, which then become a tax credit when the tax return is filed.

Treatment of employee vs contractor has as much implication for the employer as it does for the employee as it opens them up to employment law obligations.

floydbloke

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#2286927 1-Aug-2019 08:40

Lizard1977:

Thanks for that. The intention is that it would be short term (less than 3 months), and would be far less than $60k, so registering for GST is unlikely to be necessary.

That being the case hiring an accountant might not be that cost -effective. Reading your posts and the guide you linked to it seem that this is applicable:

So ringing IRD is the right thing to do, although given privacy laws he/she may have to do that him/herself

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Lizard1977

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#2286930 1-Aug-2019 08:45

sen8or:

To what extent does the employer have power over their work -

Do they dictate the how, when and where the work is conducted?

Does the person provide their own "tools of the trade" or are these provided by the employer

Is the person able to perform similar work for other employers at the same time (or after?)

These are the relevant things needed to work through to work out tax status.

There was a change in the tax law recently about contractors and a need for employers to withhold resident withholding tax from payments, which then become a tax credit when the tax return is filed.

Treatment of employee vs contractor has as much implication for the employer as it does for the employee as it opens them up to employment law obligations.

1. Sort of yes, sort of no.

2. Mostly supplied by the employer (computer, phone, workspace), but some supplied by the employee (i.e. working from home using own computer/internet part of the time)

3. Yes

I think it's kind of 50/50 - this person wouldn't be under any particular obligations, and has reasonably free rein to work how they want, but not entirely. Because it feels like a marginal case, I wondered if this person could just declare to be self-employed. Is there any risk to them if they do, but should be treated as an employee, or is the risk mostly with the employer in terms of things like Health and Safety, etc?

surfisup1000

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#2286932 1-Aug-2019 08:50

Self employed might not be covered by company insurance, so they may require indemnity insurance.

To do this properly, you need to speak to a lawyer as the employment and OSH rules are now so complex now that it is impossible to decide yourself.

Plenty of cases like this end up in court when things turn bad.

PolicyGuy

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#2286933 1-Aug-2019 08:53

For the person concerned, if this is truly a one-off, then it would be much easier for them to work as a casual employee with an agreed hourly rate and appropriate tax code (something like SEC/SL?). Whether the employer would be prepared to add them to their payroll on that basis is the likely stumbling block.

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Lizard1977

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#2286936 1-Aug-2019 09:02

PolicyGuy:

For the person concerned, if this is truly a one-off, then it would be much easier for them to work as a casual employee with an agreed hourly rate and appropriate tax code (something like SEC/SL?). Whether the employer would be prepared to add them to their payroll on that basis is the likely stumbling block.

You'd think so, wouldn't you...

For reasons of privacy, I can't really go into specifics, but internal company politics around hiring on a fixed term contract is why the idea of a self-employed contractor has been floated, so that this person can start working now until the fixed term contract issues can be sorted internally (at which point they would be engaged as an employee on a fixed term contract).

Lizard1977

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#2286937 1-Aug-2019 09:03

surfisup1000:

Self employed might not be covered by company insurance, so they may require indemnity insurance.

To do this properly, you need to speak to a lawyer as the employment and OSH rules are now so complex now that it is impossible to decide yourself.

Plenty of cases like this end up in court when things turn bad.

It's this kind of thing, and the whole employment law and OSH stuff that makes me think it's more trouble than it's worth. In real terms, I suspect the risk is very low, but even so...

wellygary

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#2286975 1-Aug-2019 09:40

Lizard1977:

You'd think so, wouldn't you...

For reasons of privacy, I can't really go into specifics, but internal company politics around hiring on a fixed term contract is why the idea of a self-employed contractor has been floated, so that this person can start working now until the fixed term contract issues can be sorted internally (at which point they would be engaged as an employee on a fixed term contract).

Does this company have a number of other people on contracts as well as those employed?...

The reason I ask is that if its simply to get round internal issues, it will stand out like dogs balls that this is actually an employment relationship rather than one of a contractor....

If the company already has a number of contractors, then it should be no problem, but if your mate is the only one ,then its probably a problem

Geektastic

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#2287003 1-Aug-2019 10:13

For something clearly intended to be short term, as OP suggests, I would try hard to be an employee.

Delphinus

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#2287009 1-Aug-2019 10:20

Also look at using https://hnry.co.nz/ to keep on top of tax that is due etc.

BlinkyBill

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#2287338 1-Aug-2019 18:43

Goodness me!

What type of contract has the person signed? It is absolutely insane to start working for revenue, and *then* working out the employment status.

This is crazy.

antoniosk

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#2287383 1-Aug-2019 20:34

BlinkyBill: Goodness me!

What type of contract has the person signed? It is absolutely insane to start working for revenue, and *then* working out the employment status.

This is crazy.

My thoughts exactly.

It almost sounds like this person is a fixed term employee, and should go on such a short-term employment contract with a fixed end date before converting to something else.

They aren't self-employed because they aren't intending to carry on working for other businesses. Its bonkers to setup as a pretend business, trigger all the associated registrations that go with it, only to have to unravel it all after demands for acc and other such things come in. What a waste of everyone's time and money.

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kharris

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#2287534 2-Aug-2019 10:01

I am a contractor and as far as the IRD is concerned I am a sole trader and am self employed even though I contract through an agency. Withholding tax for contractor has changed and the agency is required to make schedular payments which effectively means they pay tax on your behalf as you earn (unless you get an exemption). If the tax credits are not sufficient to cover my tax obligations I am then responsible to pay the difference at tax time just like any other sole trader. I am also required to pay my own ACC and GST. Some agencies generate an invoice for you, others require you to generate your own. Contractors don't get sick leave or annual leave allocations and only get paid for the hours they work. Statutory holidays are not our friend. I could set up a company to trade as if I wished but I don't have to.

I'm not sure what your friends situation is. It could be a contract (with a hourly or daily rate) or it could be a fixed term contract (basically an employee on a short term contract. These two things are very different.

I would get your friend to contact HR or payroll. They will be able to advise what their tax status is.

Due to schedular payments and changes in tax regulations your tax obligations can be relatively simple. Seting up A MyIR account with the IRD makes life pretty simple. They even remind you when you are required to file for GST or income tax.

Kirk