If you run a tradie business and pay subcontractors for labour, you may have a legal obligation to deduct tax at source before the money even leaves your account. It's called a schedular payment, and IRD has been stepping up compliance activity in the construction sector throughout 2025 and 2026. Getting this wrong can mean penalties, use-of-money interest (currently 10.91% per annum), and a nasty surprise at the end of the financial year.
Here's everything NZ tradies need to know.
What Is a Schedular Payment?
A schedular payment is a payment made to a contractor or subcontractor for services that fall within IRD's defined schedular activity list. Labour in the construction industry — including carpentry, plumbing, electrical, painting, roofing and general building work — is explicitly included.
The key difference from wages is that the worker is not your employee. If they pass the gateway test for subcontractors and you're engaging them as an independent contractor, schedular payment rules likely apply.
IRD originally called these "withholding payments" — you may still see that term in older IRD publications. The rules are governed by the Income Tax Act 2007 and updated guidance is published on the IRD website.
Who Needs to Deduct Withholding Tax?
You must deduct withholding tax from schedular payments if both of the following are true:
- You are the payer — you're a business making payments to a contractor for their labour in a schedular activity (construction work qualifies)
- The contractor is a non-PAYE worker — they're not on your payroll and they invoice you for labour services
There is a key exemption worth knowing: if the contractor is GST-registered and their services include a significant supply of materials (not just labour), the payment may fall outside schedular payment rules. However, labour-only subbies almost always trigger the requirement regardless of their GST registration status. When in doubt, deduct — you can always refund an over-deduction; you can't unwind a penalty for failing to deduct.
The Withholding Tax Rates
IRD sets the standard withholding rate for construction labour at 20%. However, the rate you apply depends on what your subcontractor provides:
| Situation | Rate |
|---|---|
| Contractor provides their IRD number and a standard declaration | 20% |
| Contractor holds a Special Tax Rate (STR) certificate from IRD | STR rate (e.g. 10%, 15% — whatever IRD granted them) |
| Contractor provides no IRD number | 33% (non-declaration rate) |
| Contractor is a non-resident | 15% (unless a DTA applies) |
The 33% non-declaration rate is a trap. If a subcontractor turns up on site and just wants to be paid, without providing their IRD number in writing, you are legally required to hold back 33 cents in every dollar. Make it a habit to collect every subcontractor's IRD number before issuing the first payment.
Contractors who believe their income tax liability will be lower than the 20% standard rate can apply to IRD for a special tax rate via their myIR account. The STR certificate is sent directly to the contractor, who then provides a copy to you.
How to Register and Pay IRD
If you start making schedular payments, you need to register as a withholding tax payer with IRD. You can do this through myIR or by calling IRD on 0800 377 774.
Once registered, your obligations are:
- Deduct the correct withholding tax from each payment to the subcontractor
- Pay the net amount (gross minus withholding) to the subcontractor
- File and pay IRD the withheld tax by the 20th of the following month
- Issue an IR15 summary to each subcontractor showing the gross payments and tax deducted for the year
For example: you pay a subbi $5,000 in May 2026. At 20%, you deduct $1,000 and pay them $4,000. You then remit that $1,000 to IRD by 20 June 2026 and file the relevant schedular payment return.
The subcontractor uses the IR15 summary when filing their own tax return — the withheld tax is credited against their income tax liability. If they've had too much withheld, they get a refund.
Record-Keeping Requirements
IRD expects you to keep the following for at least seven years:
- Each subcontractor's IRD number (written, not verbal)
- Any STR certificates provided
- A record of each payment made, the gross amount, the rate applied, and the amount withheld
- Copies of filed schedular payment returns
A simple spreadsheet works fine for smaller operations. If you're using job management software like Fergus, Tradify, or Buildxact, check whether it has a subcontractor payment register — several NZ-facing tools now include this. For accounting, both Xero and MYOB can handle schedular payment tracking natively.
You can also use Fastcrew to manage your subcontractor relationships, track payments, and store compliance documents — it's built specifically for the NZ tradie market and handles IRD number collection as part of onboarding a new subbi.
Common Mistakes (and How to Avoid Them)
Not registering at all. Many tradie businesses grow organically — one day you're a sole trader doing everything yourself, the next you're regularly paying subbies. The registration step gets overlooked. If you've been making schedular payments without registering, talk to your accountant and consider making a voluntary disclosure to IRD before they find you.
Paying the full invoice without deducting. If a subcontractor invoices you for $6,000 labour and you pay the lot, IRD will still hold you liable for the undeducted withholding tax. The obligation is on the payer, not the payee.
Mixing up materials and labour. If a subbi invoices you $8,000 for "supply and install" and $6,000 of that is materials, withholding tax only applies to the labour component ($2,000 in this case). Ask subcontractors to itemise their invoices clearly.
Forgetting the 20th deadline. IRD charges use-of-money interest on late payments. With the UOMI rate sitting at 10.91% per annum in 2026, even a few months of late payment adds up. Set a calendar reminder for the 19th of each month to process your schedular payment return.
GST and Schedular Payments
Withholding tax is calculated on the GST-exclusive amount of the payment. If your subbi is GST-registered and invoices you $5,000 + $750 GST = $5,750, you apply the withholding rate to $5,000 only. You pay the full $750 GST component as normal through your GST return.
Penalties for Non-Compliance
IRD can impose:
- Shortfall penalties of 20–150% of the unpaid tax, depending on whether the failure was due to lack of reasonable care, gross carelessness, or abusive tax position
- UOMI on unpaid amounts (currently 10.91% p.a.)
- In serious cases, prosecution under the Tax Administration Act
A voluntary disclosure made before IRD notifies you of an audit will reduce shortfall penalties by 75%. If you suspect you've been non-compliant, act early.
Download Free Templates
Managing subbi paperwork manually? Download our free NZ tradie templates — including a subcontractor onboarding form, IR15 tracking spreadsheet, and payment register — at tradietools.nz/templates/
Schedular payments are one of those compliance areas that fall through the cracks when a tradie business grows fast. Taking an afternoon to get registered, collect your subbies' IRD numbers, and set up a basic tracking system is far cheaper than dealing with IRD enforcement down the track.
NZ Tradie Tools provides free calculators, templates and guides for New Zealand tradies. Visit tradietools.nz.