Understanding the Difference Between Employees and Contractors
When you start employing staff, it's essential to register with Inland Revenue as an employer. However, if your worker invoices you for their work — including GST if they are registered — you may not need to register as an employer and account for PAYE. This means you can pay them as a contractor rather than an employee.
Why It Matters
Misclassifying an employee as a contractor can have serious consequences. If Inland Revenue later determines that your worker is actually an employee, you will be liable for any unpaid PAYE. Additionally, you may incur other costs such as unpaid holiday pay and sick leave, should an employment issue arise.
Employee vs. Contractor: The Test
Every working relationship needs to be considered on its own facts, but a person will probably be treated as an employee if they:
Have to do the work themselves and cannot employ someone else to do it.
Work set hours.
Have to work as directed.
Are not truly in control of their own business.
Have to follow the rules set by the employer.
Work on the employer's premises.
Setting Up Your Systems
Understanding the tax treatment for your employees and contractors is crucial. Make sure your systems are set up correctly to handle each type of worker. This will help you avoid any potential issues with Inland Revenue and ensure that you are compliant with all relevant regulations.
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