As Construction Accountants, we get questioned a lot regarding schedular payments and contracting. Our advice is keep it simple.
Schedular payments are made to self employed people or contractors who do not work for a PAYE wage.
The tax deducted from these payments is called withholding tax.
It's very important you're sure that the people who work for you are your employees, or if they're self employed. This is because tax, Kiwi Saver, student loan and accident compensation laws treat the two groups of people differently. You're responsible for your employees' tax deductions. It's illegal to treat a true employee as self-employed to avoid deducting tax. If you do this you may be prosecuted, fined, and still have to pay the amount of PAYE (pay as you earn) you should have deducted. In most cases it will be quite clear if someone is an employee. Generally, if you control how and when the person's work is done, the person is your employee.
If you answer "yes" to all or most of the following questions, the worker is probably your employee.
• Do they have to do the work, rather than being able to hire someone to help?
• Can you tell them what to do on the job, and when and how to do it?
• Do you pay them at a set rate (eg, hourly, weekly, monthly, or by unit of production)? A person paid by commission or on a piece-work basis may still be an employee, especially if there are other employees who work on the same basis.
• Can they get overtime or penal rates?
• Do they work set hours, or a given number of hours, each week or month?
• Do they work at your premises, or at a place you specify?
• Do you set the standards for the amount and quality of their work?
Schedular payments are payments made to people who are not employees but who are employed on a contract-for-service basis, often known as contractors.
If you are receiving schedular payments you will likely have 20%deducted, this is the standard rate for contractors on the building industry.
Most contractors can choose the rate of tax to be deducted from their payments if they don't use the standard rate for their activity.
The main activities and the standard tax rate for each activity are listed on the back of the IR330C. If you're paying someone to do one of the types of work listed you must deduct tax from the payments. Tax is deducted even if the worker is registered for GST. The only exception is if they provide you with a Certificate of exemption - IR331
You need to deduct tax from contractors who receive schedular payments.
The contractor needs to give you a completed Tax rate notification for contractors - IR330C.
You'll then need to pay these deductions to the IRD.
If the IRD notice the contractor is using the wrong tax code they'll write to you. This letter will tell you what their tax code should be. You'll need to start using the correct code and deduct tax based on that code.
Payday filing is still applicable with schedular payments by completing IR348.
Do not deduct earners' levy, Kiwi Saver deductions or student loan repayments from schedular payments – this is the worker's responsibility, not yours.
A worker who is GST-registered will charge GST on goods and services supplied. This means the worker's gross earnings will increase by the GST charged. If the worker gives you a tax invoice, work out and deduct tax on the amount, excluding GST.
ACC levies are also not levied against Schedular payments.
Remember to check with your employment advisor on the obligations and responsibilities you have towards some contractors. We are seeing increasingly that “full time contractors” are being given the same rights as employees.
As your construction accountant we can help you navigate your workforce structure from a productivity, financial, and tax perspective.