If you use subcontractors in your business, this is worth reading. IRD has been actively looking at sectors and the distinction between a genuine subcontractor and someone who should properly be classified as an employee. Getting it wrong can be expensive, and the obligation to fix it sits with you, not them.
Why It Matters
The difference between a subcontractor and an employee is not just about paperwork. It determines who pays PAYE, who is entitled to ACC levies, who gets KiwiSaver contributions, and whether your arrangement holds up if IRD decides to take a closer look.
A lot of businesses have people working for them who look, on paper, like subcontractors but in practice operate more like employees. They work set hours, exclusively for you, and additionally they use your tools and your vehicle, and do not have other clients. That profile, depending on their structure, may not be a subcontractor under NZ law regardless of what their invoice says.
This is not a new issue but IRD review activity has increased. If you have not looked at your arrangements recently there is a reasonable chance something needs attention.
The Tests IRD Uses
IRD applies a series of factors to determine the real nature of a working arrangement. No single factor is decisive but the overall picture matters. Things like whether the person works for other businesses, whether they supply their own equipment, whether they can subcontract the work themselves, whether they set their own hours, and whether they bear any real financial risk in the engagement.
If your subcontractors fail most of those tests, the classification is likely wrong. And if IRD reaches that conclusion, they can come back several years and reassess PAYE, penalties and interest included. That means back taxes, use of money interest, and potentially shortfall penalties on top. It adds up quickly.
The other risk is that a misclassified worker can raise a personal grievance as an employee even if they have been invoicing you for years. The Employment Relations Authority looks at the same substance over form test that IRD uses. Two separate exposures from the same arrangement.
What to Do
The first step is to review your arrangements and be objective about the agreements you have in place.
Some of your subcontractors will be genuine. Some may not be. A straightforward review of each arrangement against the IRD criteria will tell you where you stand. If there are arrangements that need to change, it is far better to change them proactively than to wait for an IRD audit.
This is about making sure your business is not carrying a liability and risk you don’t know about.
The Timing
IRD attention on this is ongoing, so if you have not looked at your subcontractor arrangements recently, now is a good time to do it.
The cost of getting it wrong can compound over time, while reviewing it now is a fraction of that cost.
Call Logan Granger at Johnston Associates on 027 283 8331, email lgranger@jacal.co.nz or visit johnstonassociates.co.nz
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