Withholding tax on a contractor payment.
Withholding tax
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Net payment received
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Your breakdown
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Withholding tax for contractors, explained
Schedular payments sit in the middle ground between an employee and a fully independent business. If you are a contractor in certain activities, think labour-hire, company directors, real estate agents, entertainers, or a long list of specified occupations, the payer is required to deduct withholding tax from your invoice before paying you. It looks a little like PAYE, but you are not an employee, you do not get holiday pay or sick leave, and the tax taken is only a prepayment toward the income tax you will calculate at year end. This tool shows how much is withheld at the rate you nominate, and the net amount that lands in your account.
You choose the rate on the IR330C
Unlike RWT on interest, where you pick from a fixed menu, schedular payment contractors nominate their own rate on the IR330C form they give the payer. The floor is 10 percent for most New Zealand tax residents, rising to 15 percent for non-residents and for many labour-hire arrangements. You can elect a higher rate, and often should. The reason is that the withholding is meant to approximate your eventual tax, and your real marginal rate as a contractor is frequently 30 percent or more once the income stacks on everything else you earn. Nominate something close to that marginal rate and you avoid a nasty bill in February.
A $10,000 invoice at a 20 percent rate
Say you invoice $10,000 for a contract and you have elected a 20 percent withholding rate. The payer deducts $2,000 and pays you $8,000. That $2,000 is sent to Inland Revenue against your tax bill, but it is not the final word; your actual tax depends on your total income and your deductible business expenses for the year. The arithmetic is simple, and that simplicity is the trap, as the next section explains.
The number this calculator does not show: GST
Here is the judgement that catches new contractors. Withholding tax is income tax only. It says nothing about GST. If your contracting turnover exceeds the $60,000 GST registration threshold in any twelve-month period, you must register for GST, charge 15 percent on top of your fees, and file returns. Withholding is calculated on the GST-exclusive amount, so the two run on parallel tracks. Plenty of first-year contractors see $8,000 land from a $10,000 invoice, spend it, and then discover they also owe GST on their billings. A practical tip: if you are anywhere near $60,000 of annual contracting income, set aside both the income tax buffer and a GST provision from day one, because the threshold is measured on a rolling basis and creeps up on people mid-year.
Expenses and the year-end square-up
The flip side of being a contractor rather than an employee is that you can deduct genuine business expenses, vehicle running costs, tools, a home-office portion, professional fees, against your contracting income. That means your taxable profit is often well below your gross invoices, and the withholding tax already paid may cover most or all of your eventual bill. If you have deducted plenty and your rate was generous, you can even end up with a refund. If your expenses are thin and you nominated only the 10 percent minimum, expect to owe the difference. Schedular payments can also pull you into the provisional tax system once your residual tax for a year tops $5,000, so a strong year often means provisional instalments the next year.
Can I get a lower withholding rate than the minimum?
Yes, in some cases. If the standard 10 or 15 percent rate would clearly over-tax you, perhaps because your business has high costs and low net profit, you can apply to Inland Revenue for a special tax rate certificate that sets a lower withholding rate, or even a zero rate, for the year. It is not automatic; you have to apply and justify it. For most contractors the simpler path is to nominate a rate that matches their expected marginal rate and let the year-end assessment sort out the detail.
What happens if I do not hand over an IR330C?
If you do not give the payer a completed IR330C, a no-notification rate applies, which is higher than the standard minimums and is designed to discourage going without one. It is the same logic as the no-declaration rate on interest: the system penalises missing paperwork. Completing the form and electing a sensible rate is quick, and it stops the payer from being forced to withhold at the punitive default.