Tax on contractors & withholding tax

Schedular payments explained

A schedular payment is a payment to a contractor that has tax withheld at source by the payer, in a way that looks a bit like PAYE but is not the same thing. You are still a contractor, still self-employed, and still responsible for your own overall tax. The withholding is simply IRD collecting some of your tax early, before you file.

The key difference from an employee is what the withheld tax represents. For an employee, PAYE is usually close to their final tax. For a contractor on schedular payments, the withholding is a credit toward a final tax bill that also depends on your expenses, any other income, and your tax rate. Treating the withheld amount as "tax done" is one of the most common and expensive contractor mistakes.

Who has tax withheld at source

Schedular payments apply to certain types of contractor work and to contractors hired through certain arrangements. Broadly, withholding can apply when:

• Your work falls within an activity listed in the rules for schedular payments (a defined set of contractor activities).
• You work through a labour-hire arrangement, where withholding generally applies to the payments you receive.
• You have voluntarily opted in, choosing to have tax withheld to make your own tax management easier.

That voluntary option is genuinely useful. Many contractors who would otherwise face large provisional tax instalments choose withholding precisely because it spreads their tax across the year automatically. Whether withholding applies to you depends on the nature of the work and the arrangement, so it is worth checking rather than assuming based on how a previous contract was paid.

Choosing your withholding rate

When you start a contract subject to schedular payments, you complete a tax rate notification and choose a withholding rate. This is where you have real control, and getting it right protects you at year-end.

• Pick a rate that roughly matches your expected marginal tax rate once expenses are taken into account.
• If you have high business expenses, a lower withholding rate avoids tying up cash you would only get back as a refund later.
• If you have few expenses or other untaxed income, a higher rate reduces the chance of a year-end shortfall.

There are minimum rates that apply, and special rules if you want to go below the standard floor (which generally needs IRD's agreement via a special tax code). The aim is balance: high enough that you are not left with a big bill, low enough that you are not lending IRD money interest-free all year. We help contractors set this rate from their real numbers rather than guessing.

How it flows into your IR3

At the end of the tax year, schedular payments are pulled into your IR3 like any other self-employed income. The mechanics are:

• Your gross schedular income is declared as business income.
• You claim your business expenses against it, the same as any contractor or sole trader.
• The tax already withheld is recorded as a credit against your final tax.

So the final position is: tax on your net profit, minus the tax already withheld, equals what you owe or are refunded. If your withholding was set sensibly, this comes out close to zero. Importantly, contractors on schedular payments can still deduct legitimate expenses — vehicle, tools, home office, software, ACC — which employees cannot. That is one of the real advantages of contracting, and it is lost if you forget to claim.

Expenses and the rest of your tax

The withheld tax only looks at your gross payments. Your actual tax depends on the full picture:

• Expenses reduce your taxable profit — vehicle and mileage, home office, equipment depreciation, professional fees, insurance and more.
• ACC levies still apply and arrive as a separate bill, so contractors need to plan for them on top of income tax.
• Other income — a second contract, investment income, or a partner's income for shared credits — interacts with your overall position.
• GST is separate again, and kicks in once your turnover crosses $60,000 in a 12-month period.

Because withholding ignores all of this, the contractor who keeps good expense records and claims fully often ends up with a refund, while the one who ignores expenses overpays. The withholding is a starting point, not the answer.

Avoiding a year-end shortfall

The contractors who never get a tax surprise tend to do the same handful of things:

• Set a realistic withholding rate from the start, based on expected profit not gross pay.
• Track expenses all year so you claim everything and your taxable profit is accurate.
• Set aside extra for ACC, which the withholding does not cover.
• Watch the $60,000 GST line if your contracting is growing.
• File on time so refunds come back quickly and any balance is known early.

This is general information, not personalised tax advice. Your situation may differ, so book a free review to discuss it with us or check ird.govt.nz.

In plain English: withholding tax on contractor pay is a prepayment, not your full tax bill, so pick a sensible rate, claim every legitimate expense, and remember ACC and GST sit on top.