Contractor or employee? What’s the difference?
Whether you are transitioning from being an employee to a contracting position in New Zealand, or just want to know what’s the difference between the two, this article will help you understand the main differences.
Employees usually have set times and days to be at work. Self-employed people quite often can choose when and where to do the work. It’s especially nice to be a contractor if you like to go on longer holidays as you don’t have to ask your boss for an extended leave. It is not uncommon for self-employed people to plan holidays between the contracts. In addition, contractors can also make themselves unavailable for their clients on certain days of the week.
Contractors usually don’t get paid for annual leave and sick leave. As contractors usually have the flexibility to choose when and where to do the work, they also don’t get paid extra for working on holidays. Contractors usually budget for the unpaid annual leave or sick leave when charging for their services.
How much do I get paid?
Contractors are usually paid by the work done set in the contract for services. Contractors choose their own rates and agree with their clients on them. Employees must receive at least the minimum wage for every hour worked, contractors can be paid whatever rate they agreed to with the client. Contractors usually issue invoices to their clients to get paid for the work they have done while employees get paid automatically.
Working as a contractor can be very rewarding and many people enjoy the flexibility that comes with it
Taxes and ACC levies?
Contractors pay their own taxes and ACC levies. They have to sort out government obligations on their own, which includes submission of IRD returns. Contractors must register for GST if earning over $60,000. In some cases, clients might deduct withholding tax from the payments to contractors and transfer it to IRD on contractor’s behalf.
Self-employed people are not covered by most employment-related laws. They have to contribute to KiwiSaver on their own if they choose to as they have no employer who makes contributions for them.
What about business expenses?
Contractors are usually treated as being in business and therefore are expected to cover their own business-related expenses. They are quite often expected to perform work by using their own equipment for their clients. If a client doesn’t cover the expenses for the contractor, everything that helps contractors earn business income in most cases is tax-deductible and can help reduce the tax bill at the end of the year. Contractors sometimes buy insurance to cover them against any financial losses or legal action taken against the business for services or advice provided to clients.
Work with multiple organisations?
Contractors usually can choose how many clients they work with unless specified otherwise in the contract of services. It is especially helpful if you like to change the environment you are working at often. In addition, clients usually expect contractors to be highly skilled in what they do and therefore contractors usually don’t require to be closely supervised. That’s also why contractors are usually well-paid.
How much should I charge?
Make sure you charge your clients the rate that takes into account that you won’t be paid for annual leave, sick leave and public holidays (roughly 35 working days each year) and that you will have to cover your business expenses, taxes and ACC levies and contributions to KiwiSaver – it’s not even the end of the list! It can help to browse the ads where organisations search for contractors to provide services for them. Other self-employed people from the industry can also help you understand the rates they charge for providing similar services.
Especially when you start out it can feel that there are so many things to think about. Make sure you have good systems in place – it will help you to have the peace of mind and have everything under control.
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The information provided here is of a general nature. It is not intended to be a substitute for professional advice.