Contractor vs Employee — What's the Real Difference?
One of the most common questions for NZ tradies considering going self-employed: will I take home more money as a contractor? The answer depends heavily on your income level, expenses, and the hidden costs of self-employment.
What Employees Get That Contractors Don't
- 4 weeks paid annual leave — worth approximately 7.7% of annual salary
- Employer KiwiSaver — 3.5% of gross wage contributed by employer
- Sick leave — 10 days/year after 6 months
- PAYE handled automatically — no provisional tax, no UOMI risk
What Contractors Get That Employees Don't
- Tax deductions on expenses — tools, vehicle, phone, insurance, home office, accountant
- Choice of structure — operate as sole trader, partnership, or company
- Flexibility — work for multiple clients, set your own rates
- Higher gross rates — the market generally pays contractors more per hour to compensate for self-employment costs
The ACC Difference
As a PAYE employee, you pay the ACC earners' levy only (1.60%). As a sole trader, you pay both the earners' levy and a working cover levy (rate depends on your industry — typically 1.39% for most trade work). This is an additional cost employees don't face.
The Gateway Test
IRD uses the Contractor Gateway Test to determine whether a worker is truly self-employed. Getting this wrong can result in back-taxes and penalties. See our Gateway Test article for details.