Contractor vs Employee in NZ: What's the Difference?
An employee works for an employer and receives employment entitlements, such as paid leave. An independent contractor runs their own business, agrees a fee with a client and manages their own costs and tax. In New Zealand, the legal working arrangement matters, not just the job title or whether someone sends an invoice.
Contractor vs Employee: Key Differences
Equipment, hours and payment terms vary. Check the agreement as well as the legal status.
| What changes | Employee | Independent contractor |
|---|---|---|
| Relationship | Works for an employer | Runs a business serving clients |
| Contract | Employment agreement | Contract for services |
| Tax | Employer deducts PAYE | Manages tax; some payments have tax withheld |
| Leave | Paid annual and sick leave, subject to eligibility | No employee leave entitlement |
| Work arrangements | Employer usually directs the work | Usually more independence, within agreed terms |
| Equipment and costs | Often provided by employer | Often pays business costs |
| ACC | Earners' levy deducted through payroll | Own ACC bill, including work-related levies |
| KiwiSaver | Payroll deductions and eligible employer contributions | Arranges own contributions |
How Tax Works for Contractors and Employees
Employees have PAYE deducted before their wages reach their bank account. A contractor working as a sole trader pays income tax on profit: business income minus allowable expenses. Both use the same personal income-tax brackets. Contracting through a company is different; this article compares an employee with a sole-trader contractor.
Not every contractor receives the full invoice amount. Some payments are schedular payments, meaning the payer deducts withholding tax. That is a payment towards the contractor's final income-tax bill, not proof that they are an employee. Provisional tax may also apply.
Business expenses can reduce taxable profit, but spending $100 does not save $100 in tax. Only eligible business costs are deductible, and mixed personal/business costs need to be split. Our sole trader tax guide explains the calculation.
GST is separate. Registration is generally required when taxable turnover reaches at least $60,000 in the last 12 months, or is expected to reach that amount in the next 12 months. Charging GST also triggers registration. Salary is not business turnover, and GST collected is not extra take-home pay.
Employees pay the ACC Earners' levy through payroll. Self-employed contractors generally pay Earners', Work and Working Safer levies through ACC; the work component depends on their activity. For eligible employees, the default KiwiSaver deduction and compulsory employer contribution became 3.5% from 1 April 2026, with temporary reduction rules available. Sole-trader contractors arrange their own saving and do not receive compulsory employer contributions from clients.
Leave, Holiday Pay and Employment Rights
Employees generally become entitled to four weeks' paid annual holidays after 12 months' continuous employment. Eligible employees receive 10 days' paid sick leave after six months, with a further entitlement each year. A public holiday is paid when it falls on a day they would otherwise work. Working on it attracts at least time-and-a-half, and usually an alternative holiday when it is an otherwise working day.
Part-time employees still have leave rights. Casual employment is not the same as contracting, and its holiday-pay arrangements depend on the circumstances. Genuine contractors do not receive these employee entitlements, although their contracts can provide agreed payments. Health and safety obligations apply to both.
How Do You Know if You're a Contractor or Employee?
New Zealand introduced the contractor gateway test on 21 February 2026. All its requirements must be satisfied: a written agreement stating contractor status; freedom to work for others outside the agreed work; either freedom over when to work or a qualifying right to subcontract; the ability to refuse extra work without ending the arrangement; and a reasonable opportunity to get independent advice before agreeing.
The subcontracting condition has limits on client vetting, including permitted qualification and criminal-record checks. Get advice if those conditions are unclear.
Failing the gateway does not automatically make someone an employee. The common-law tests then consider intention, control, integration into the business and whether the person is genuinely in business on their own account. The gateway is not retrospective: earlier periods need separate consideration. Calling someone a contractor, or asking them to invoice, is not enough on its own. Check Employment NZ's classification guidance if the arrangement is unclear.
Who Earns More: a Contractor or an Employee?
Sarah is offered $40 an hour as an employee or $55 an hour as a contractor. The contractor offer is higher, but she must allow for time off, business expenses, ACC, retirement saving and gaps between jobs. Hours spent quoting and sending invoices may not be billable.
Compare the whole year, not just the hourly rate. Our Contractor vs Employee Calculator compares estimated cash income after deductions. It uses simplified contractor ACC and does not value paid leave or employer KiwiSaver contributions, so it cannot tell you which overall package is better.
Is It Better to Be a Contractor or Employee?
Employment may suit someone who values regular pay, paid leave and less administration. Contracting may suit someone who wants to run a business and can manage uncertain income. Neither is always better. Check what the offer actually includes and whether contracting is legally appropriate. For practical setup steps, read how to become a contractor in NZ.
Frequently Asked Questions
Can I be an employee and a contractor at the same time?
Yes, in separate working arrangements. Check employment restrictions and keep business records. Your overall income affects your tax position.
Does working for only one client make me an employee?
Not automatically. The applicable legal tests consider the arrangement, not just the number of clients.
Do I need a company to work as a contractor?
No. Many contractors operate as sole traders. A company is a separate structure, not a requirement for contracting.
Rules checked on 10 October 2026 against Employment NZ and IRD guidance, including sole-trader tax, GST registration and KiwiSaver changes. General information only; get advice for your own employment or tax situation.