Understanding the difference between an employee and a contractor can seem a bit confusing and sometimes not essential. However, it is very important to correctly differential the two as it will affect the rights and obligations of both parties.

Who is an employee?

An employee is anyone employed to work under an employment agreement and works in return for a wage or salary. An employee is covered by employment legislation such as the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003.

An employee is entitled to minimum breaks during their shift, sick leave, annual leave and other minimum employment rights under employment legislation. Employees also have extra rights, like the right to take a personal grievance.

An employer must keep records for all its employees such as employment agreement, hours worked, leave accrued etc. The employer is also responsible for making deductions such as PAYE, Kiwisaver, Child Support Payments etc and paying this to the IRD.

Who is a contractor?

A contractor is a person who works for someone under a contract for service. Contractors are normally self-employed and invoice their clients for their services. They are not covered by employment legislation hence not entitled for minimum employment rights.

Contractors are also responsible for their own taxes and ACC levies. However, the might have schedular deductions depending on their contracts.

Importance of correctly classifying as employee or contractor

Incorrectly classifying an employee as a contractor can lead to consequences such as the agreement being declared a sham by the employment relations authority and the employer liable for penalties plus, unpaid PAYE tax, minimum wages and leave entitlements.

The courts have developed some legal tests to determine the difference between an employee and a contractor, there tests are:

• Intention test
• Control vs independence test
• Integration test
• Fundamental/economic reality test

Intention Test

What was the intention of the parties when entering into the agreement?

This will be detailed into the written agreement the parties have.

Control vs independence test

What degree of control does the employer have over the person (the control test)?

The greater the control excised over the worker the more likely they are an employee. A contractor has more flexibility to choose the hours the work, who they work for, the tools to use etc.

The degree of independence will be looked at when deciding if a person is an employee or a contractor.

Integration Test

Is the work performed by the person fundamental to the organisation? Is the type of work performed usually performed by an employee or a contractor?

If the work is continuous, fundamental to the organisation and normally done by employees, it’s more likely the person performing it is an employee.

However if it’s a one off task/project, supplementary part of the business then it could be done by a contractor.

Fundamental/Economic reality test

A contractor usually runs their own business and charges fees (invoices) for its services. An employee works for wages or salary.

A contractor can be paid whatever rate is agreed to. An employee must receive at least the minimum wage for all hours worked.

A contractor can provide services to multiple organisations, where as an employee normally works one full time job.

Note: The above test work together to determine if a person is an employee or a contractor.

Independent contractors are self-employed people who control what work they do and how it is done. Since they are not employees no tax or PAYE is deducted, however they may be subject to schedular payments.

It is also important to note that you can be self-employed in one line of work and still work in another job as an employee. For most people they might have a full-time job as an employee and have a part time (side-job) work where they are self-employed.

Self-Employed/Independent Contractors & Locums are responsible for meeting their own tax obligations.

GST Registration

If as a Self-Employed/Independent Contractors or Locum you are earning more than $60,000 per year you are required to register for GST.

In some situations, even if you are earning less than $60,000 you might be required to register for GST, for example in cases where you are paid GST under a contract.

Income Tax Returns

You have to file IR3 income tax returns at the end of the financial year. It is advisable to take professional assistance when doing this.

Some of the problems we see when you file your own tax returns are:

• Not claiming all expenses
• Not declaring all income or declaring income in incorrect periods
• Claiming private expenditure, note you can still claim home office expenses

If you are unsure what to do, contact us today for a free no obligation conversation.

What business records you need to keep and for how long

Keeping proper records is important for businesses of any size. It will not only help you complete your year end tax returns but also ensure you have proof of income and expenses in case you get audited by the Inland Revenue Department.

Outlined below are some of the business records you should keep. Rule of thumb is to keep all records for 7 years as required by law. The best way to keep records is to store them online and have backups. With emergence of cloud storage, it’s easier and safer to store all your business records online using services such as dropbox.

Wages & Salaries

• Signed Employee/Contractor Agreements
• Tax Code declaration and Kiwi Saver Forms

Physical book or online records with details each payday:

• Total gross earnings, including taxable allowances
• Amount of earnings not liable for ACC earner levy
• The amount of PAYE deducted (taking into account any tax credits for payroll giving donations)
• Any payroll giving donations and tax credits for them
• Child support deductions if any
• Student loan deductions
• KiwiSaver employee deductions
• KiwiSaver employer contributions (gross)
• KiwiSaver employer contributions
• Superannuation contributions
• ESCT (employer superannuation contribution tax)
• Taxable value of any employee share scheme (ESS) benefit
• Total tax, plus student loan and child support, deducted from the ESS benefit (if any)
• Value of tax-free reimbursing allowances
• Personal service rehabilitation payment

Income & Claiming Expenses

Tax Invoices

Keep records of all tax invoices issued. Make sure your tax invoices are valid.

For a tax invoice to be valid it must have:

• the words “tax invoice” in a prominent place
• the name and registration number of the supplier
• the name and address of the recipient
• the date the tax invoice is being issued
• a description of the good and services supplied
• the quantity or volume of the goods and services supplied and either:
• the total amount of tax charged, the consideration excluding tax and the consideration inclusive of tax, or
• the consideration for the supply and a statement that includes the tax charge.

Record of expenses

In order to claim for expenses against your income you must keep proper records of all expenses.

The records of your expenses should include:

• invoices for purchases of more than $50, which you must receive when you buy goods or services on credit for the business.
• evidence of payment (eg, invoice, cash sale docket, till receipt) for purchases of $50
• evidence of credit card purchases, including credit card vouchers, payment receipts and monthly statements. Also keep the invoice issued at the time of purchase.

Cashbooks

If you use cashbooks to record your sales and expenses these much be complete and accurate.

Use a cashbook to record all money that your business pays and receives. Include all transactions made by any means, including cheque, direct credit, internet and telephone banking, and automatic teller machines.

At the end of each month, reconcile the cashbook with your bank statement by balancing the payments and receipts in your cashbook with your bank balance.

Online or computer-based accounting system

It is easy and efficient nowadays for small business to keep records using desktop/cloud-based accounting systems.

If you are using such a system, your records must:

• be sufficient for legal purposes
• be in English unless the IRD has approved another language
• can be kept in any form, as long as they contain the necessary information

Banking records

With online banking it has become much easier to keep your banking records.

Normally banks keep your records even after your bank accounts have been closed, however you are still required to keep all your bank statements, cheque & deposit books.

Petty Cash

Petty cash is a small amount of money kept on hand to make day-to-day incidental purchases for items that are too small to pay by cheque or eftpos. Record small cash expenses and attach the receipts to a blank page in your petty cash book and balance it at least monthly.

Vehicle Logbook

If you use your own vehicle in the business, you can claim the running costs. If you use it to travel from home to work, or any personal travel, you’ll need to separate business and private use. To do this, keep a logbook of business and private use of motor vehicles so you only claim the business portion of the vehicle expenses. You must keep a logbook for at least three months, every three years, to work out the business share of the running costs.

You don’t have to keep a logbook if you use the vehicle only for business—you can claim the full running costs without making any adjustments.

When a company owns a vehicle, it can claim the full running costs without making any adjustments. However, the company must pay fringe benefit tax if the vehicle is available for employees’ or shareholder-employees’ private use. The company will also have to calculate GST on the fringe benefit.

* By no means is the above a comprehensive list of all records required to be kept by a business, this will differ from business to business. Contact us if you need advice on your record keeping.

Congratulations, as if you are reading this you either have made the brave move to be your own boss or are seriously considering it.

As far as business structures go small companies in New Zealand are very common. There are many advantages to operating under a company name which easily out-weight the costs.

Advantages of operating our business under a company name:

Limited Liability

As the name says a company’s liability is limited to assets owned by the company. Unless the shareholders provide personal guarantees or there is illegal activity, creditors cannot make a claim on the personal assets of shareholders.

Obtaining Finance

Creditors and finance providers may view a company more favorably than a sole trader in terms of offering finance. Sole traders face more difficulty getting loans because their personal credit history and personal finances are considered and they may be perceived to be more risky than companies.

Lifespan

A company does not close down if its shareholders die or resign unlike sole traders. The perpetual existence of companies allows current shareholders to transfer or sell their shares to new shareholders, friends or family.

Taxes

Companies in most parts of the world have a lower tax rate than individuals. This is to encourage business and to acknowledge risks taken by a business vs employees. New Zealand has a company tax rate of 28% whereas the highest individual tax rates is 33%.

Company formation

Now that you have decided on forming a company, how do you actually do it?

Forming a company in New Zealand is relatively easy. All you need is a real me ID. You can get this here https://www.realme.govt.nz/

Once you have a real me ID, you can create a profile on the companies office website: https://companies-register.companiesoffice.govt.nz/

Once done follow the steps to register a company. First you will need to reserve a company name. Choose this carefully and make sure it does not match or is similar to another company name, as it may be rejected and you will have to pay another fee to reserve another name.

Once your company name has been approved you can use this to form the company. You will need to enter details such as number of shares, share allocation, details of shareholders and company directors. You will also have to decide if you want to register for GST.

Once the above is done you will get directors and shareholders consent forms, you have to fill/sign these and upload to the company’s office website.

Upon approve of these your company is formed and you will get a confirmation email with the certificate of incorporation and company extract.

Maintaining a company

You have to file an annual return to update the publicly available information about your company. It this is not filed on time the companies’ registrar will remove the company form the register.

Note: An annual return is not a tax return or financial statement — it’s a yearly update of publicly available information about your company on the Companies Register. To remain on the register, you must confirm or update particular information when you file your annual return.

Companies Act 1993

Companies in New Zealand are legislated by the Companies Act 1993, this act states the requirements of companies such as company constitution, issue of shares and annual meetings.

Unless you are using a professional it is a good idea to read this act when forming or operating a company.

Companies Act 1993: http://www.legislation.govt.nz/act/public/1993/0105/200.0/DLM319570.html

Summary

While it may seem like a daunting task to form a company it might be better for your business in the long term.

Take professional advice if you are not sure how to best structure your business. A good structure can save you thousands in the future.

Looking from a layman’s perspective all outgoings for a business are expenses. Whether it be buying a business vehicle or paying a supplier. At the end of the day its money going out of the business and should be deductible in the tax returns.

However like everything else in tax it is not so simple. There are two types of expenditure Revenue and Capital. Revenue expenditure is your everyday business expenses such as paying suppliers, entertainment, office expenses, paying employees etc. These expenses are generally deductible in the same income year they are incurred in.

Capital Expenditure is expenses incurred to buy or upgrade a fixed asset. Such as buying a business vehicle or buying new machinery. These expenses are not fully deductible in the same income year. In case of fixed assets these are depreciated according to their estimated useful life.

Revenue and capital expenditure can also differ from business to business. For example buying a company car will be capital expenditure for a cleaning business however it will be revenue expenditure for a car dealer.

Still confused about what’s deductible for your business, contact us for answers to your specific questions.

First of all what are expenses?

Expenses are costs which you incur in the day to day running of the business. You can claim most of these expenses usually in the tax year they are incurred. The more expense you claim the low your profit will be and the lower tax you have to pay.

So what expenses can I claim?

You will mostly be claiming revenue expenses in full in the year you incur them and you will depreciate capital expenses (buying assets) over time.

Common business expenses you can claim are:

• vehicle expenses, transport costs and travel for business purposes (for vehicles used for both personal and business purpose apportionment is required, you will need to keep a log book to determine this)
• rent paid on business premises
• depreciation on items like computers and office furniture
• interest on borrowing money for the business
• some insurance premiums
• work-related journals and magazines
• membership of professional associations
• work-related mobile phones and phone bills
• stationery
• work uniforms
• tax agent’s fees.

What about Entertainment expenses?

Almost every business will have some entertainment expenses such as meals while travelling, Corporate Boxes or staff Christmas parties. Business entertainment expenses are usually deductible, however for some are only 50% deductible while others are 100% deductible.

Expenses which have a private element are only 50% deductible. Some examples are:

• Corporate boxes
• Holiday accommodation (can be 100% depending on usage)
• Recreational Boats
• Food and Drink at business premises
• Social events such as Christmas Parties
• Offsite food and drink
• Gifts of food and drink

Examples of expenses which are 100% deductible

• Food and drink while travelling on business
• Food and drink provided at a conference
• Light meals provided in a dining room for senior managers
• Promoting your business, products or services
• Cost of Freebies promoting your business
• Entertainment supplied for charity
• Offshore entertainment

Getting a tax agent or accountant to complete your return may end up saving you money. They know all the things you can claim for.

Contact us if you want to discuss specific items which you can claim for in your tax returns.