As a small business owner in New Zealand, you've likely hired contractors to help grow your business. Whether it's a freelance graphic designer, a digital marketing specialist, or a tradesperson, contractors can provide valuable expertise without the long-term commitment of hiring employees. However, paying contractors comes with specific tax obligations that many small business owners find confusing.
Getting contractor payments wrong can lead to penalties, interest charges, and unnecessary stress. The good news? Understanding your obligations doesn't have to be complicated, and using the right payroll system can make the entire process easy-as.
What are schedular payments?
Schedular payments are payments made to contractors who do certain kinds of work, mainly involving the supply of labour. When specific conditions are met, tax must be deducted from these payments - but the process is different from salary or wage payments. These payments typically apply to contractors who perform specific activities such as construction work, agricultural services, cleaning, or other labour services - we’ve provided a list of activities at the end of this article.
With regular invoicing, contractors handle their own tax obligations. But with schedular payments, you need to deduct tax before paying the contractor. This system ensures that tax is collected upfront on contract work, helping both IRD and contractors manage tax obligations more effectively. The key distinction is that schedular payments involve a withholding tax system similar to PAYE for employees, but with different rates and rules specifically designed for contractor relationships.
What is withholding tax, and when do you need to deduct it?
Withholding tax is the tax you deduct from schedular payments. You need to treat your management of withholding tax similarly to how you manage PAYE obligations for employees.
You need to deduct tax from contractors who receive schedular payments, and you must then pay the withheld tax to IRD and send them specific filing information.
Withholding tax must be deducted from schedular payments unless:
- The contractor has an exemption certificate or 0% special tax rate certificate
- The payments are being made to the contractors company and they’re not payments being made under specific excluded labour hire arrangements.
- The payments are being made to non resident contractors
Further down in this article we’ve covered the activities that IRD lists with their prescribed tax rates.
What rate should you use to deduct withholding tax?
The tax rate you use depends entirely on what the contractor provides you:
- With IR330C form: Use the tax rate specified on their completed IR330C form. If the contractor has given you an IR330C form, use the declared tax rate.
- Without IR330C form: If they have not given you an IR330C form, then you must deduct tax at the no-notification rate of 45%.
- With tailored tax rate certificate: if the contractor has provided you with a tailored tax rate certificate, use the tax rate shown. Some contractors can apply for a tailored tax rate. They’re only valid for a specific period of time, and the contractor must reapply to get another.
Understanding obligations
Your obligations as the payer
When you're required to deduct withholding tax from schedular payments, you become responsible for:
- Getting the correct tax rate: Contractors that you pay should let you know their schedular or tailored tax rate, exemption for schedular payments or prescribed withholding rate. The contractor needs to give you a completed tax rate notification for contractors - IR330C form.
- Calculating and deducting tax: Deduct the right amount of withholding tax. Remember that you do not need to deduct student loan repayments, KiwiSaver deductions or ACC levies from schedular payments. At PaySauce, we see both payers and even other payroll systems making a few common mistakes with these calculations - more below!
- Filing employment information: You must file information to IRD within specific timeframes, depending on your filing method and frequency.
- Paying the deducted tax: Pay IRD the withholding tax you deducted from contractor payments. This is due at the same time as when you pay any PAYE you deducted from employees' wages.
The contractor's obligations
Contractors receiving schedular payments must:
- Provide their tax rate: Contractors should complete and provide you with an IR330C form specifying their tax rate.
- Meet minimum tax rates: The lowest percentage a contractor can enter is 10% (15% for non-residents). For NZ residents the minimum requirement is 10 percent, while non-residents start at 15 percent.
- Apply for tailored rates if needed: If a contractor thinks their rate should be lower than that on the form, they can use the IRD calculator to estimate the rate and apply for a tailored tax rate. Contractors cannot use a tax rate lower than 10% without applying for a tailored tax rate.
- Manage their own taxes: The contractor is still responsible for their tax obligations overall, and must correctly manage their filing and payment obligations. The withholding tax system doesn’t automatically fulfill contractor tax obligations and they’ll still have things to manage.
Your filing obligations
Managing schedular payment obligations involves several ongoing responsibilities that vary depending on your filing frequency and method. You’ll still need to file the withheld tax to IRD as well as complete specific information in your IRD filing. This includes the relevant information for the Employment Information filing as well as Pay Day Filing, and making the payments to IRD on the due dates. This is pretty similar to managing and filing PAYE for employees.
Tips, common mistakes and important information
Calculate correctly: When deducting withholding tax from contractors, the tax is calculated on the ‘whole dollar’ amount only. This is what is listed in IRD’s specifications. A common mistake we see is that the tax is deducted by calculating this as a percentage of the total gross value, including the cents. We often get questions from employers who have moved their payroll to PaySauce only to see the withholding tax is calculating differently from their other system - this is because we are correctly using the IRD specifications to calculate this tax value, and the other system isn’t!
No KiwiSaver: Contractors don’t have KiwiSaver deducted or paid in payroll. Upcoming changes to IRD filing requirements in October 2025 mean if you try to file KiwiSaver values through IRD filing for someone on a WT tax code, the file will not be accepted by IRD.
Other excluded deductions: You only deduct income tax from schedular payments - no other deductions apply, including student loan deductions and ACC levies. These are the contractor's responsibility to manage separately. The earner premium (ACC levy applied to salary and wage payments) isn’t applied to schedular payments.
Filing changes: IRD will make changes to no longer accept non-individual IRD numbers for contractors through payday and employment information - likely in 2026. Contractors must use their individual IRD numbers, not their company IRD numbers.
GST: Don’t deduct withholding tax from the GST portion of an invoice if relevant. In PaySauce, we have a contractor payment type preconfigured to pay GST separately as a non taxable payment which won’t accidentally end up in your withholding tax calculations, but still show nicely for the contractor as part of the total invoice amount.
Is my contractor really an employee? Great question! Another topic we get a lot of questions on. We’ve got you covered here - Employees vs Contractors: A Small Business Owners Guide to Getting it Right
The bottom line
These aren't just administrative hassles - they have real financial consequences. Between late filing penalties, non-payment penalties that compound monthly, and potential interest charges, the costs can quickly exceed what you'd pay for a payroll system. A single late filing penalty for not filing payday filing on time is $250. File late a couple of months in a row and you’ll rack up a substantial cost.
More importantly, getting it wrong can damage your relationship with contractors who may face tax complications because of incorrect deductions, and it can trigger IRD audits that consume valuable time and resources.
This is exactly why many smart businesses choose to use professional payroll systems like PaySauce - the automated compliance and expert support eliminate these common pitfalls entirely. Not to mention you can even get your contractor timesheeting their hours directly into PaySauce - saving you both time and effort!
Remember, when in doubt, it's always worth consulting with a tax professional or contacting IRD directly. Your contractors and your business will benefit from getting it right from the start.
Quick Reference: prescribed activities and tax rates
Below are the specific activities that require withholding tax, taken directly from IRD's contractor tax notification form. The percentage in brackets is the prescribed tax rate (remember, if no notification is provided, you must use 45%).
For the complete list, see Schedule 4 of the Income Tax Act 2007.
- ACC personal service rehabilitation payments (attendant care, home help, childcare, attendant care services related to training for independence and attendant care services related to transport for independence) (10.5%)
- Agricultural contracts for maintenance, development, or other work on farming or agricultural land (not to be used where CAE code applies) (15%)
- Agricultural, horticultural or viticultural contracts by any type of contractor (individual, partnership, trust or company) for work or services rendered under contract or arrangement for the supply of labour, or substantially for the supply of labour on land in connection with fruit crops, orchards, vegetables or vineyards (15%)
- Apprentice jockeys or drivers (15%)
- Cleaning office, business, institution, or other premises (except residential) or cleaning or laundering plant, vehicles, furniture, etc. (20%)
- Commissions to insurance agents and sub-agents and salespeople (20%)
- Company directors' fees (33%)
- Contracts wholly or substantially for labour only in the building industry (20%)
- Demonstrating goods or appliances (25%)
- Entertainers (New Zealand resident only) such as lecturers, presenters, participants in sporting events, and radio, television, stage and film performers (20%)
- Examiners fees (33%)
- Fishing boat work for profit-share (supply of labour only) (20%)
- Forestry or bush work of all kinds, or flax planting or cutting (15%)
- Freelance contributions to newspapers, journals (eg, articles, photographs, cartoons) or for radio, television or stage productions (25%)
- Gardening grass or hedge cutting, or weed or vermin destruction (for an office, business or institution) (20%)
- Honoraria (33%)
- Modelling (20%)
- Payment by a labour hire business to any person (eg individual, partnership, trust or company) performing work or services directly for a client of the labour hire business or a client of another person, under a labour hire arrangement (20%)
- Payments for the following (15%)
- caretaking or acting as a guard
- mail contracting
- milk delivery refuse removal, street or road cleaning
- transport of school children
- caretaking or acting as a guard
- Proceeds from (non retail) sales of the following (25%)
- eels
- greenstone
- sphagnum moss
- whitebait
- wild deer, pigs or goats or parts of these animals
- Public office holders fees (33%)
- Shearing or droving where CAE code does not apply (15%)
- Television, video or film: on-set and off-set production processes for New Zealand residents (20%)
- Voluntary schedular payments (20%)
This guide covers the essentials, but every business situation is unique. Tax rules can change, so we always recommend:
- Checking directly with IRD for the latest requirements
- Consulting with a tax professional for complex situations
- Using professional payroll software to ensure compliance
Remember, getting it right from the start saves time, money, and stress for both you and your contractors.
