Contractors vs Employees: The GST Trap
Are you a sole trader or a PAYE employee? Your GST obligations depend entirely on this distinction.
One of the most common questions in the NZ gig economy is: "Do I need to pay GST on my wages?"
The answer depends on your legal status. Employees never charge GST on their wages. Contractors must charge GST if they earn over $60,000.
The Simple Test
Look at your payslip or bank deposit.
- If tax (PAYE) is deducted before you get paid, you are likely an Employee.
- If you get the full amount (and pay your own tax later), you are likely a Contractor.
Contractors (Sole Traders)
If you invoice for your time (e.g., IT consultant, builder, designer), you are running a "taxable activity". Unlike employees, you are a business in your own right.
1. The $60,000 Threshold
You have a choice depending on your turnover:
- ✓ Under $60k (Voluntary): You can choose whether to register. If you do, you must charge GST, but you can claim back GST on your expenses (Computer, Home Office, Car).
- ✓ Over $60k (Mandatory): You MUST register. You invoice $100 + $15 GST = $115. You pay the $15 to IRD.
2. Deductible Expenses (The Benefit)
As a contractor, you can claim GST on business expenses that employees cannot.
- ✓ Vehicle Expenses: Fuel, repairs, insurance. (See our guide on Motor Vehicle Claims).
- ✓ Home Office: A portion of your rent, power, and internet can be claimed if you work from home.
- ✓ Equipment: Computers, tools, phones.
- ✓ ACC Levies: Your ACC invoice will include GST. You can claim this back! (Employees have it deducted automatically without GST benefit).
Employees (PAYE)
If you have an employment contract, you are providing "services as an employee". This is exempt from GST (Section 6(3)(b)).
Even if you earn $200,000 a year as a CEO, you do not register for GST.
The "Control" Test Warning
The IRD looks at who controls your work. If your boss tells you when to come in, how to do the job, and provides all the equipment, you are likely an employee, even if your contract says "Contractor".
The Gray Area: Schedular Payments
Some industries (film, agricultural, labour hire) have "Withholding Tax" deducted from their pay, even though they are technically contractors. This is called "Schedular Payments".
John works on a movie set. The production company deducts 20% tax from his pay.
Do I charge GST?
YES. Even though tax is deducted, John is still a contractor. If his gross income exceeds $60,000, he must register for GST and issue a tax invoice to the production company (Gross + GST).
Comparison Summary
| Feature | Employee | Contractor |
|---|---|---|
| GST Registration | Never | Mandatory if >$60k |
| Income Tax | Deducted by Employer (PAYE) | Paid by You (Provisional Tax) |
| Claim Expenses? | No | Yes (Home office, tools, car) |
| Invoicing | None (Payslip) | Must issue Tax Invoices |
Next Steps
If you are a contractor, you need to set up your systems correctly.
- Accounting Basis: Most contractors choose the Payments Basis to avoid paying tax before they get paid.
- Registration: Register online via myIR. It takes 15 minutes.
- Avoid Mistakes: Check our guide on Common GST Mistakes to avoid fines.
Contractor vs Employee Tests
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