Contractor vs Employee Tax in NZ

At $80,000 of gross income, an employee takes home about $59,186 per year after PAYE, ACC, and 4% KiwiSaver. A contractor earning the same $80,000 keeps more of their income initially, but pays their own ACC levies, misses out on employer KiwiSaver contributions, and needs to manage provisional tax and potentially GST. (Examples use 4% KiwiSaver, the default rate from April 2028. The current minimum may be 3% or 3.5%.) The real difference depends on your expenses, your industry, and whether you value certainty or flexibility.

Use the Forge Money PAYE calculator to see the employee side of this equation.

Employee vs contractor: how IRD tells the difference

The distinction between employee and contractor isn't something you choose freely. It's determined by the real nature of the working relationship, regardless of what your contract says (Employment NZ).

IRD and Employment NZ look at several factors:

Factor	Employee	Contractor
Control over how work is done	Employer directs the work	You decide how to do the work
Tools and equipment	Provided by employer	You provide your own
Financial risk	Employer bears the risk	You bear the risk of profit or loss
Ability to subcontract	Usually can't delegate	Can hire others to do the work
Integration	Part of the business	Running your own business
Exclusivity	Usually one employer	Can work for multiple clients
Hours	Set by employer	Set by you

If you're classified as a contractor but IRD determines you're actually an employee, the employer can face penalties for not deducting PAYE. Getting the classification right matters (Employment NZ).

For the legal tests, see Employment NZ at employment.govt.nz. This page covers the tax differences, not employment law.

PAYE vs provisional tax: how each works

Employees: PAYE

As an employee, your employer deducts PAYE from every pay cycle and sends it to IRD. You don't need to do anything. Tax is paid as you earn, in real time. At the end of the year, IRD does an automatic assessment and tells you if there's a small amount to pay or refund (IRD).

Contractors: provisional tax

As a contractor, nobody deducts tax for you. You're responsible for paying your own income tax, and if your residual income tax is over $5,000, you'll pay provisional tax in instalments throughout the year (IRD).

The standard method splits your estimated annual tax into three payments:

Instalment	Due date (2025-26)
1st	28 August 2025
2nd	15 January 2026
3rd	7 May 2026

Your provisional tax is initially based on the previous year's tax plus 5%. As your income changes, you can adjust your estimates. If you underpay, IRD charges use-of-money interest at 10.91%. If you overpay, you get a lower rate of interest back (IRD).

The AIM (Accounting Income Method) option lets you pay provisional tax every one or two months based on actual income, which avoids the guesswork. It requires compatible accounting software (IRD).

ACC levies: employees vs self-employed

This is one of the biggest cost differences. Both employees and contractors pay the earner's levy. But contractors also pay a work levy that employees don't see because the employer covers it (ACC).

ACC levy	Employee	Contractor
Earner's levy (non-work injuries)	Currently 1.67% of income up to $152,790 (2025-26)	Currently 1.67% of income up to $152,790 (2025-26)
Work levy (work injuries)	Paid by employer (not visible to you)	Paid by you, rate depends on industry
Typical work levy (office-based)	N/A	~0.08%
Typical work levy (trades/construction)	N/A	0.50% to 3.00%+

For an office-based contractor on $80,000, the extra cost is minimal, around $64 per year in work levies. For a tradesperson, the work levy can be $400 to $2,400 or more per year (ACC).

ACC invoices self-employed people directly, usually in the second half of the year following the income year. The invoice is based on your IR3 taxable income.

KiwiSaver as a contractor: what you miss out on

This is the hidden cost of contracting that many people underestimate.

KiwiSaver component	Employee	Contractor
Your contributions	Automatic from pay (3%, 4%, 6%, 8%, or 10%)	Voluntary, you manage it yourself
Employer contribution	Minimum 4% of gross pay (from April 2028; currently 3%, rising to 3.5% from April 2026)	None. You have no employer.
Government contribution	Up to $521.43/year (for $1,042.86 contributed)	Up to $521.43/year (for $1,042.86 contributed)

On $80,000, the employer contribution at 4% is $3,200 per year. That's money an employee gets for free that a contractor doesn't. Over 30 years at a 7% return, that missing $3,200/year compounds to roughly $303,000 (IRD).

Contractors can still contribute to KiwiSaver voluntarily and receive the government contribution. But you need to actively set up contributions and remember to contribute at least $1,042.86 per year to get the full $521.43 government match (IRD).

For more on this, see our guide to KiwiSaver for self-employed.

GST registration: when you must register

If your contracting revenue exceeds $60,000 in any 12-month period (not just the tax year), you must register for GST and charge 15% on your services (IRD).

If you earn under $60,000, GST registration is optional. It can be worth registering voluntarily if you have significant GST-inclusive business expenses (equipment, vehicle costs, home office), because you can claim the GST back on those expenses.

Once registered, you file GST returns (monthly, two-monthly, or six-monthly) and pay the difference between GST collected on income and GST paid on expenses.

GST doesn't affect the comparison below because it's passed through to clients (you charge $80,000 + GST = $92,000, remit the $12,000 GST to IRD, and keep $80,000). But it does add administration and cash flow complexity.

For more detail, see our GST guide for small businesses.

Expenses you can claim as a contractor

One advantage of contracting is the ability to deduct legitimate business expenses from your taxable income. Employees generally can't do this. Common deductible expenses for contractors include (IRD):

Expense type	What's deductible
Home office	Proportion of rent/mortgage interest, power, internet, based on area and usage
Vehicle	Business-use proportion of running costs, or the IRD mileage rate (currently $0.97/km for the first 14,000 km)
Equipment	Computers, tools, software, phones used for business
Professional development	Courses, certifications, conferences related to your work
Professional fees	Accountant, tax agent, legal fees for business matters
Insurance	Professional indemnity, public liability, income protection (business portion)
Phone and internet	Business-use proportion
Marketing	Website, advertising, business cards

The key rule: expenses must be incurred in earning your assessable income. Personal expenses aren't deductible, even if they're convenient for work. IRD expects you to keep records and receipts for seven years (IRD).

Side-by-side comparison: $80,000 as employee vs contractor

Here's the dollar-for-dollar difference at $80,000 gross income in the 2025-26 tax year. The contractor example assumes office-based work, no GST registration, and $5,000 in claimable business expenses.

Employee at $80,000

PAYE breakdown (IRD, 2025-26 rates):

Income bracket	Tax rate	Tax amount
$0 to $15,600	10.5%	$1,638
$15,601 to $53,500	17.5%	$6,633
$53,501 to $78,100	30%	$7,380
$78,101 to $80,000	33%	$627
Total PAYE		$16,278

Item	Annual	Weekly
Gross income	$80,000	$1,538.46
PAYE	$16,278	$313.04
ACC earner's levy (1.67%)	$1,336	$25.69
KiwiSaver employee (4%)	$3,200	$61.54
Take-home pay	$59,186	$1,138.19
Employer KiwiSaver (4%)	+$3,200	+$61.54
Total remuneration value	$83,200

Contractor at $80,000 (with $5,000 expenses)

Item	Annual	Weekly
Gross income	$80,000	$1,538.46
Business expenses claimed	-$5,000	-$96.15
Taxable income	$75,000	$1,442.31
Income tax on $75,000	$14,721	$283.10
ACC earner's levy (1.67% of $75,000)	$1,253	$24.10
ACC work levy (~0.08% of $75,000)	$60	$1.15
Voluntary KiwiSaver (4% of $75,000)	$3,000	$57.69
Take-home pay (if contributing to KiwiSaver)	$55,966	$1,076.27
Take-home pay (no KiwiSaver)	$58,966	$1,133.96

Income tax breakdown on $75,000 (IRD, 2025-26 rates):

Income bracket	Tax rate	Tax amount
$0 to $15,600	10.5%	$1,638
$15,601 to $53,500	17.5%	$6,633
$53,501 to $75,000	30%	$6,450
Total income tax		$14,721

The real comparison

Item	Employee	Contractor (with $5K expenses)	Difference
Gross income	$80,000	$80,000	$0
Income tax / PAYE	$16,278	$14,721	Contractor pays $1,557 less
ACC (total)	$1,336	$1,313	Similar
KiwiSaver (your contribution, 4%)	$3,200	$3,000	Similar
Employer KiwiSaver	+$3,200	$0	Employee gets $3,200 extra
Business expenses (actual cost)	$0	$5,000	Contractor spends $5,000
Tax saved on expenses	$0	$1,557	Contractor saves $1,557 in tax
Net cost of expenses after tax saving	$0	$3,443	Contractor's real expense cost
Net financial position	$62,386	$58,966	Employee is ~$3,420 ahead

The employee comes out ahead by about $3,420 at $80,000, primarily because of the employer KiwiSaver contribution ($3,200). Examples use 4%, the rate from April 2028. The contractor's tax savings from deducting expenses partially offset this, but not entirely.

The gap narrows if the contractor has more deductible expenses or charges a higher rate to compensate. Many contractors charge 20% to 30% more than the equivalent salary to account for the missing employer benefits (ACC work levy, KiwiSaver, paid leave, sick leave).

Which structure works for your situation?

The answer depends on your specific circumstances. Here are the factors that matter most:

Contracting tends to work better when:

• You can charge a rate that's 20%+ above the equivalent salary
• You have significant legitimate business expenses to deduct
• You value schedule flexibility and the ability to choose clients
• You earn over $180,000 (the tax difference becomes less significant relative to income)
• You're disciplined enough to manage your own tax, ACC, and retirement savings

Employment tends to work better when:

• The offered salary is close to what you'd earn contracting
• You value employer KiwiSaver contributions (4% minimum from April 2028, some employers offer more)
• You want the certainty of paid leave, sick leave, and public holidays (worth 8 to 12% of salary)
• You don't have many deductible business expenses
• You prefer not to manage provisional tax, GST returns, and ACC invoices

The paid leave factor

Employees get at least 4 weeks of annual leave, 10 sick days, and 11 public holidays per year (Employment NZ). That's roughly 31 to 35 days of paid time off. A contractor working the same number of days earns nothing during those periods.

On $80,000, those leave entitlements are worth approximately $8,600 to $10,800 per year. Combined with the employer KiwiSaver contribution, the total "hidden" benefit of employment is roughly $11,000 to $13,200 per year at the $80,000 level.

This is why the common advice is that contractors need to earn at least 20% to 30% more than the equivalent salary to be financially comparable.

Common questions

What's the difference between a contractor and an employee for tax purposes in NZ?

Employees have PAYE deducted from their pay automatically, receive employer KiwiSaver contributions (minimum 3%, rising to 3.5% from April 2026 and 4% from April 2028), and have their ACC earner's levy handled by their employer. Contractors pay their own income tax via provisional tax, don't receive employer KiwiSaver, pay their own ACC levies (including the work levy), and can deduct business expenses from their taxable income (IRD).

Do contractors pay more or less tax than employees in NZ?

At the same gross income, a contractor's income tax bill can be lower because of business expense deductions. However, contractors miss out on employer KiwiSaver contributions (3%+ of pay), paid leave entitlements, and pay their own ACC work levy. When you factor in all these costs, employees are typically better off unless the contractor charges a significantly higher rate (IRD, Employment NZ).

Do I need to register for GST as a contractor?

You must register for GST if your revenue exceeds $60,000 in any 12-month period. Below that threshold, registration is optional. If registered, you charge clients GST (15%) on top of your fees and can claim GST back on business expenses (IRD).

How does provisional tax work for contractors?

If your residual income tax is over $5,000 for the year, you'll pay provisional tax in three instalments (August, January, May). The amount is based on the previous year's tax plus 5%, though you can adjust estimates. If you underpay, IRD charges use-of-money interest at 10.91% (IRD).

Can I be both an employee and a contractor at the same time?

Yes. Many people have a regular job (employee) and do freelance or contract work on the side (contractor). You'll have PAYE deducted from your employment income and need to declare your contracting income in an IR3 tax return. If your total contracting income tax exceeds $5,000, you'll need to pay provisional tax on that portion (IRD).

What expenses can I claim as a contractor?

Legitimate business expenses including home office costs, vehicle expenses (business use), equipment, software, professional development, accounting fees, insurance, and marketing costs. The expense must be incurred in earning your assessable income. Keep receipts for seven years (IRD).

Do contractors get KiwiSaver employer contributions?

No. Contractors don't have an employer, so there's no employer contribution. You can make voluntary contributions to KiwiSaver and receive the government contribution (up to $521.43/year for $1,042.86 contributed). The missing employer contribution at 4% (from April 2028) is worth $3,200/year on $80,000 of income (IRD).

How much more do I need to charge as a contractor to match a salary?

A common benchmark is 20% to 30% above the equivalent salary. This accounts for the missing employer KiwiSaver contribution, paid leave (annual leave, sick leave, public holidays), and the administrative cost of managing your own tax and ACC. At an $80,000 salary, the equivalent contractor rate is roughly $96,000 to $104,000 (Employment NZ).

What happens if IRD decides I'm an employee, not a contractor?

If IRD determines the working relationship is actually employment, the employer can face penalties for not deducting PAYE, not paying employer KiwiSaver, and not paying the employer ACC work levy. This can result in back-payments and penalties. The determination is based on the real nature of the relationship, not what the contract says (Employment NZ, IRD).

What to do next

• Calculate your employee take-home pay to see the PAYE side of the comparison
• Understand NZ tax brackets and how progressive rates affect both structures
• Learn about ACC levies and the difference between earner's and work levies
• Read about KiwiSaver for self-employed if you're contracting and want to optimise your retirement savings
• See the GST guide if you're approaching the $60,000 registration threshold

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Last updated: 1 March 2026. Sources: IRD (ird.govt.nz), ACC (acc.co.nz), Employment NZ (employment.govt.nz). This is financial information, not financial advice. It is also not employment law advice.