Sole Trader Vs Company Tax Overview
A sole trader vs company tax overview is the map of who pays income tax, on which Inland Revenue return, and at which rate. A sole trader and the business are the same person. A company is a separate legal person with its own IRD number.
Inland Revenue taxes self employed people as individuals. Most companies pay 28% on leftover profit. Registering a company does not make supermarket money tax free. Salary, drawings, and dividends still sit on a personal bill when the money leaves the business.
Two New Zealand situations
Use case: Wellington designer, own name
Situation: PAYE studio job plus weekend invoices of $42,000 in their own name. Allowable expenses $6,400. Net profit $35,600. Clients pay the person, not a Ltd.
Tax: Inland Revenue: self employed people use the tax rate for individuals. That profit sits on the IR3 with the studio wages. Drawings are not a wage. IR325: tax is on net profit after expenses and before drawings.
Action: stay on the individual return unless liability or investors change the picture. A dollar split on that profit is on the self employed calculator, not a 28% company worksheet.
Use case: Hamilton tradie Ltd
Situation: renovation contracts now sit in a company. The owner takes a salary. Leftover profit stays in the company for a new ute. One head contractor still writes most of the invoices.
Tax: IR325: the salary is taxed individually. The company pays tax on profit after expenses, including that salary, at the company rate. Most companies: 28%. If the personal services tests are met, Inland Revenue can still attribute that income to the working person.
Action: file the IR4 for the company and the owner’s personal return. Do not treat 28% as the only rate on money taken home. Check the 80% buyer test before assuming leftover profit stays at 28%.
Official starting point
Inland Revenue’s tax rates for businesses table: self employed, the tax rate for individuals. Most companies, 28%. Māori authorities, 17.5%. Unincorporated organisations, the tax rate for individuals. First year of business: file at year end and pay a lump sum. After that, instalments called provisional tax may apply.
How tax is charged on profit
business.govt.nz choosing the right business structure: the structure you pick changes how you own the business, how you distribute profits, how you pay taxes, and how you share risk. Most New Zealand businesses are sole traders, companies, or partnerships. A company has a different legal status from a sole trader. That status changes the rules that apply.
Inland Revenue’s self employed page: self employed people carry out business activity on their own. That includes contracting, working as a sole trader, and small business owners. Usually a self employed person can start without following any formal or legal set up tasks. You use your individual IRD number. You pay tax on net profit by filing an individual income return. You can claim expenses for that business activity.
business.govt.nz sole traders: you do not need to set up as a legal company. You do need to let Inland Revenue know, and have a personal IRD number. You keep the profits. You are in charge of calculating and paying your own taxes every year. You are also responsible for ACC levies and GST, if appropriate.
| Clock | Sole trader | Ordinary company |
|---|---|---|
| Legal person | You and the business are the same person. business.govt.nz: personally responsible for all debts. | Legally separate. Shareholders pay company debts up to the value of their shares. |
| IRD number | Your individual IRD number. | The company has its own IRD number. You still have a personal one. |
| Income tax return | Individual return (IR3 path). Inland Revenue: tax on net profit. | IR4G 2026: active New Zealand resident companies, except look through companies, complete an IR4. Look through companies complete an IR7. |
| Tax rate on leftover profit | Tax rate for individuals, from 1 April 2025: 10.5% on 0 to $15,600, then 17.5%, 30%, 33%, and 39% from $180,001. | Most companies 28%. That rate is on company profit after expenses, including salary. It is not a flat rate on every dollar you spend at home. |
| Taking money out | IR325: usually no wage. Drawings. Tax is on net profit before drawings. Drawings are not a deductible expense. | IR325: a salary is taxed individually. Company tax is on profit after that salary. Profits belong to the company. |
| Companies Office | No company incorporation. No annual return fee. | Name reserve $10 plus GST. Incorporate $118.74 plus GST. Annual return $49.74 plus GST. That annual return is not a tax return. |
| GST | Inland Revenue: register if you earn over $60,000 a year. | Same GST clock on the company’s taxable supplies. Structure does not change the $60,000 test. |
The sole trader bands sit on Inland Revenue’s tax rates for individuals page from 1 April 2025: 0 to $15,600 at 10.5%, $15,601 to $53,500 at 17.5%, $53,501 to $78,100 at 30%, $78,101 to $180,000 at 33%, and $180,001 and over at 39%. Those are the same bands as wages. A Dunedin photographer with a PAYE cafe job already uses the lower bands on wages. Invoice profit then sits on the leftover bands. Filing steps for that IR3 sit in the IR3 filing checklist for sole traders.
Drawings versus a company salary
Inland Revenue’s Business IR325 guide is the drawings rule people mix up with a wage. If you are in business in your own name, or in a partnership, you will usually not get a wage. You take money when you need it, called drawings. You pay income tax on your net profits. The taxable income is the net profit after deducting all allowable expenses and before any drawings. In a partnership, that net profit is shared between the partners and included in their personal returns.
If the business is a limited liability company and pays you a salary, you are taxed on that salary individually. The company must pay tax on its profits, which are the gross takings less all the business expenses, including your salary. Any profits belong to the company and are taxed at the company rate. IR325 also says drawings are not a deductible expense, and money you bring into the business is not taxable income.
That is why a company only changes the rate on leftover profit the company keeps. If you take the lot as a salary, you are back on individual rates plus a second return. A dollar estimate for the sole trader path is on the self employed tax calculator. This site does not run company IR4 maths.
Trap: 28% on everything you take home
Forum threads still treat 28% as cheaper tax on the same living costs. Inland Revenue: most companies pay 28% on company profit. IR325: the salary is still taxed in your name. Profits belong to the company. 28% is also higher than the 10.5% and 17.5% individual bands. If all profit is needed for rent and food, a company adds an IR4 without changing the personal rate on money you actually spend.
The 28% company rate myth
The company rate is a flat 28% on leftover company profit. Individual rates still apply when you take a salary. Dividends later sit on the shareholder’s personal return. This page does not print a worked $100,000 tax saving, because Inland Revenue does not publish that example. Compare published rates. Do not invent a bill.
From 1 April 2025, 28% sits between the 17.5% band and the 30% band. Below $53,500 of individual taxable income, 28% on retained company profit is not automatically cheaper than staying on the IR3. Above $78,101, 33% and 39% are higher than 28% on money the company keeps. The gap only exists while the profit stays in the company. Taking it out as salary puts it back on the individual table.
Inland Revenue: generally, businesses file at the end of the first year and pay a lump sum. After the first year they pay instalments called provisional tax. That clock can sit on a sole trader and on a company. Instalment methods sit in provisional tax for businesses. The first year myth for people in their own name sits in first year self employed no provisional myth.
Pull highlight: Inland Revenue attribution rule, all tests: personal services, associated entity, working person earns net income of more than $70,000 including attributed income, at least 80% from that buyer, at least 80% earned by the working person and relatives.
Attribution rule for personal services
Inland Revenue’s attribution rule for income from personal services is aimed at people diverting employment income to an associated entity, such as a company, trust, or partnership, to avoid higher individual rates. It is the official answer to “I will pay myself a small salary and leave the rest at 28%” when one buyer is funding the work.
The rule applies when all of the following apply. A working person provides personal services. They are associated with an entity. That entity provides services to a buyer, the services are personally performed by the working person, and the working person earns net income of more than $70,000 including income of the associated entity if the rule applies. At least 80% of the entity’s income from personal services comes from that buyer and associated persons. At least 80% of that personal services income is earned by the working person and relatives.
The rule does not apply when any listed exemption applies. Those include both the entity and the working person being non residents for the full year, the entity being a natural person who is not a partner or trustee, services that are essential support for a product the entity supplies, substantial business assets, certain controlled foreign company tests, and a total amount to attribute under $5,000. Inland Revenue: the $5,000 exception can only be relied on once.
Substantial business assets are depreciable property that are not for private use, or no more than 20% private use, and that have a total cost of more than $75,000, or 25% or more of the entity’s income from services for the year. A logbook ute used half privately will not clear that private use test. Forum talk that “a car beats attribution” is not the Inland Revenue wording.
Look through companies
Inland Revenue’s look through companies page: a look through company is a special type of company. It is a separate legal entity, but for income tax it is treated like a partnership. Owners can offset the look through company’s losses against their other income. They must pay tax on a look through company’s profits. That is not the 28% company table.
IR4G, Company tax return guide 2026: all companies that are active and New Zealand resident for tax purposes, except look through companies, must complete an IR4 each year. Look through companies complete an IR7 each year they are a look through company. If you picked a look through company for losses in year one, do not file an IR4 as if you were on 28%.
Companies Office clocks are not the IR4
You can choose to register for an Inland Revenue number, a GST number, and as an employer during incorporation. That is still a tax registration, not a substitute for the IR4. Beany still prints older annual return fees. Use the Companies Office figure of $49.74 plus GST.
GST uses the same turnover test
Inland Revenue: you need to register for GST if you earn over $60,000 a year. That sentence sits on the self employed page. A company does not get a different GST threshold. Registration steps sit in register for GST in NZ. TradeFlow and LegalVision still print older individual bands or a single 28% story. Follow the Inland Revenue tables opened for this page.
Filing and clocks for people in their own name sit on the Self Employed Tax hub. This page is the structure map: IR3 versus IR4, individual rates versus 28% on leftover company profit, and the attribution tests.
When a company can wait
business.govt.nz: being a sole trader is the cheapest and easiest option. You are personally responsible for all debts. It can be harder to get investment, and harder to sell. If you start as a sole trader, you still have the option to set up a company later. A company is legally separate, which limits risk and liability. Companies generally have more credibility, so it is easier to grow, attract investment, and sell. They have to follow extra rules.
A partnership is two or more people in business together. Partners are all liable for the partnership’s debts. That can put personal assets at risk. It is a third path, not a company. Whichever structure you choose, business.govt.nz: your business can hire staff once you are registered with Inland Revenue, can export goods, and must pay tax.
You do not need a company to invoice, claim expenses, or register for GST. You need a company when the legal split, investors, or leftover profit actually change the picture. You do not need a company because a forum said 28% is cheaper. Check Inland Revenue, the Companies Office, and an accountant before you incorporate.