An employee has PAYE, KiwiSaver and leave handled by their employer; a contractor runs a small business, charges GST once over the threshold, claims expenses and manages their own tax and ACC. The headline rate looks higher as a contractor, but the after-tax picture turns on deductions, ACC and the admin you take on.
The two options at a glance
The difference between being an employee and a contractor is not just a label; it changes who handles your tax. An employee is paid through the payroll with PAYE deducted at source. A contractor is effectively running a business: you invoice, set money aside for tax, may register for GST, and deal with IRD yourself.
- Employee — PAYE, KiwiSaver and ACC earner levy are deducted for you; you get paid leave and entitlements.
- Contractor — you receive gross or schedular payments, file an IR3, manage provisional tax, claim expenses, and carry your own ACC cover.
The label on the contract is not what decides your status. IRD and the courts look at the real nature of the relationship: who controls how the work is done, whether you can send a substitute, who carries the risk and reward, and how integrated you are into the other party's business. Getting this right matters, because a worker treated as a contractor who is really an employee creates back-dated PAYE, KiwiSaver and leave liabilities.
Tax treatment compared
Both pay tax on the same individual income-tax scale, so the rates are identical. What differs is when and how the tax is collected, and what you can deduct first.
| Point | Employee | Contractor |
|---|---|---|
| How tax is paid | PAYE at source | You pay, often via provisional tax |
| Deductible expenses | Very limited | Genuine business costs deductible |
| GST | No | Register once turnover tops $60,000 |
| ACC | Earner levy via PAYE | You pay ACC CoverPlus on earnings |
| Leave and KiwiSaver | Employer provides/contributes | Your own responsibility |
The ability to deduct real business costs (tools, vehicle, home office, insurance) is the contractor's advantage. The trade-off is no paid leave, no employer KiwiSaver contribution, and an ACC bill that arrives separately. Some contractors receive schedular payments with tax withheld at source, which softens the provisional-tax shock.
Schedular payments deserve a closer look. In certain activities, a payer must withhold tax from a contractor's payments at source and pass it to IRD, much like PAYE but without the rest of the employment package. If your work falls into a schedular category, tax is pre-paid as you earn, which softens the year-end and provisional-tax shock. You can often elect your own withholding rate so it matches your real tax position rather than a default.
Cost and cashflow
An employee's cashflow is smooth: tax comes out before the money lands, and there is little to set aside. A contractor must discipline themselves to put away tax and, once over the threshold, GST, then meet provisional-tax dates. A common mistake is treating gross income as take-home and getting caught at year-end.
Against that, a contractor can often charge more, deduct genuine costs, and structure the work flexibly. The right rate should cover the lost leave, KiwiSaver and ACC, plus a margin, otherwise contracting can pay less than it looks.
A simple rule of thumb for setting a contracting rate: start from the employee salary you would accept, then add for the holiday pay, sick leave, public holidays, employer KiwiSaver and ACC you will now fund yourself, plus the gaps between contracts and the admin time. Only then add your margin. Contractors who simply match the hourly equivalent of a salary usually end up worse off once those costs are counted.
Risk and admin
Contracting carries more admin and more risk: you file your own return, manage provisional tax and ACC, and you have no paid sick or annual leave. Get the tax-saving habit wrong and a year-end bill plus use-of-money interest can hurt. Employment shifts almost all of that risk to the employer.
There is also a status question. Calling someone a contractor does not make them one if the working relationship looks like employment; IRD and the courts look at the substance. Getting the status right matters for both sides.
ACC is the cost most new contractors forget. As a self-employed person you pay ACC CoverPlus levies based on your earnings, billed separately from your income tax, and the first year's invoice can be a surprise. It buys you cover for injury, but it needs budgeting for. An employee, by contrast, has the earner levy taken quietly through PAYE and never sees a separate bill.
Which suits which owner
- Want stability, leave and simplicity — employment, with tax handled for you.
- Want flexibility, multiple clients and to claim real costs — contracting, with the admin that comes with it.
- New to contracting — budget for tax, GST, ACC and no paid leave before you set your rate.
Talk it through with us
We can model your actual after-tax position both ways, factoring in the deductions you could claim, your ACC cover and the leave and KiwiSaver you would forgo. That turns a confusing headline rate into a clear number you can compare.
Book a free review and we will show you the real difference for your situation.
This is general information only, not personalised tax advice. Confirm your situation with us or check ird.govt.nz.
In plain English: same tax rates, but a contractor trades paid leave and simplicity for flexibility and deductible costs, and must set aside tax, GST and ACC themselves.
This is general information, not personalised tax advice.See our full disclaimer.