Blog
Oct 02
Schedular payments for contractors

Schedular Payments Guide for Contractors

When you work as a contractor or freelancer, the tax world gets less straightforward. One concept you’ll often hear is schedular payments. Understanding how they work can save you from surprises and ensure you stay on the right side of the IRD. Here’s everything you (and your clients) need to know, with examples to keep it simple.

In this article:

What are schedular payments?

Schedular payments are a way of taxing certain kinds of contractor income by having tax withheld at source, before you even see the full amount. In other words, your client deducts tax from what they pay you and sends it to Inland Revenue (IRD).

These payments apply when the work is primarily labour or services, rather than when you’re selling goods. They’re different from typical wages or salaries because you’re still responsible for your own income tax return and paying any additional tax if not enough has been withheld by your client.

A big bonus of receiving schedular payments is that you can claim expenses against the income and reduce your tax bill.

Who needs to use schedular payments?

Schedular rules don’t apply to everyone, so it’s good to know when they do (and when they don’t).

People who usually receive schedular payments

You may receive payments under schedular rules if you:

  • Work as a contractor supplying labour or services (e.g. builders, electricians, cleaners, Uber drivers)
  • Are contracted via a labour-hire or temping company and work for their clients
  • Do “labour-only” contracting—not supplying large equipment or products as part of your contract
  • Are a non-resident contractor doing work in NZ (with special rules)
  • Are paid certain “schedular-type” payments like directors’ fees, commissions, competition prizes (in some cases)

When schedular rules likely don’t apply

You typically won’t use schedular payments if:

  • You supply goods or sell items as your main business
  • You’re a contractor but fully integrated (your agreement is closer to a service supply of goods + services)
  • You perform your work via a company in many cases, though exceptions exist
  • The payer and contractor agree that the work should fall outside schedular rules (via a voluntary arrangement)

Also, you can sometimes apply for an exemption certificate so the payer does not withhold tax under schedular rules, if you meet certain criteria (e.g. good tax history).

How schedular payments work (step by step)

Let’s walk through what happens when you receive schedular payments.

  1. You provide services under contract (labour, consulting, etc.)
  2. You complete a IR330C Tax rate notification for contractors for that payer, declaring which withholding rate they should use
  3. The payer deducts tax from your payment according to that rate, sends the net to you, and pays the withheld tax to IRD
  4. At year end, you file your income tax return (IR3 for individuals) and compare your total tax owing vs what’s already been withheld. Your schedular payment income and the withholding tax amount paid will be automatically included in your tax return, so you don’t need to keep track of them.

If the tax withheld is more than your total tax owing, you get a refund. If it’s less, you’ll pay the difference. And if your residual tax is high (more than NZD $5,000), you may need to pay provisional tax during the following year.

Choosing or defaulting a tax rate

You don’t just accept whatever rate IRD or your payer gives you. You get some control through the IR330C form.

  • The IR330C includes a list of standard rates by activity (e.g. contracting, labour hire)
  • You can elect a different rate, within limits, that better matches your expected income and expenses. You can use the IRD’s tax rate estimator tool to help work out your rate.
  • If you do not supply an IR330C, the payer must use a non-notified rate, typically 45%
  • You cannot choose a rate lower than 10% without applying for a tailored rate and providing evidence (e.g. that your expenses will reduce your tax burden).

Also, the IRD may impose a prescribed withholding rate on you if your tax obligations are not being met (i.e. IRD deems you a risk).

Worked examples

Example 1: Simple contracting job

You agree with Client A to do a job for $2,000 (excluding GST). You’ve filled out IR330C and chosen a withholding rate of 20%.

  • Payer deducts $400 (20%) as withholding tax
  • You receive $1,600
  • At year-end, you include the full $2,000 in your income tax return, and subtract the $400 already withheld

If your final tax liability is $350, you’d get back $50. If it’s $450, you pay an extra $50.

Use our withholding tax calculator to see how much take-home pay you will receive.

Example 2: GST-registered contractor

You run your contracting business and are registered for GST. You invoice $1,500 + 15% GST = $1,725 to the payer.

If your withholding rate is 20%, the payer calculates withholding on the base amount (pre-GST):

  • Base service amount: $1,500
  • Withholding (20%): $300
  • Payer pays you: $1,725 – $300 = $1,425

You still remit the $225 GST in your GST return, and separately account for the $300 withheld tax in your annual tax return.

Example 3: No IR330C submitted

You did work worth $1,000, but didn’t complete IR330C for that payer.

  • The payer applies the non-notified rate, e.g. 45%
  • Withheld: $450
  • You receive: $550
  • At year-end, you file your tax return. If your actual rate should only be 20%, you’ll get a refund for the difference.

Claiming schedular payment expenses

Even though tax is withheld from your income upfront, you’re still entitled to claim business expenses just like any other sole trader or contractor. The withholding only covers part of your tax, it doesn’t replace your annual tax return.

How it works

  • Your total schedular income (before tax was withheld) is automatically included in your income tax return.
  • You also include your business expenses for the year, such as tools, vehicle use, home office costs, software, and professional fees. See our business expenses article for a full list of expenses.
  • Your tax is calculated on net profit (income minus expenses).
  • The tax already withheld by your clients is then credited against what you owe.

Example

You earn $50,000 in schedular income.

  • Your clients withheld $10,000 in tax at 20%.
  • You also had $12,000 in deductible expenses (travel, equipment, insurance, etc.).
  • Your taxable income becomes $38,000.
  • At year-end, IRD works out your tax on $38,000. Let’s say it comes to $7,600.
  • Since $10,000 has already been withheld, you’ll get a refund of $2,400.

Don’t forget to keep records of your expenses. Withholding tax doesn’t mean you lose the ability to deduct costs, it just means part of your tax has already been paid before you file.

Common pitfalls & tips

  • Don’t forget the IR330C: Missing it means you get stuck with the harsh non-notified rate.
  • Pick a realistic rate: Too low and you get surprised with extra tax to pay. Too high and you lose cash flow unnecessarily.
  • Watch your expenses: If your expenses are high, a lower rate may make sense.
  • Understand GST: Withholding is calculated on the before-GST amount.
  • Track expenses: Track and claim your business expenses to reduce your tax bill.
  • Understand ACC: As a contractor earning schedular payments you are responsible for paying ACC.

How Solo supports schedular payments

Using Solo, you can:

  • Automatically track your schedular payment income and how much tax has been withheld
  • Track multiple payer relationships (each with its own IR330C rate)
  • Easily claim expenses
  • Create professional invoices
  • Automatically generate GST returns and your income tax return
  • Calculate your projected income tax (i.e. how much more you may need to pay)

That means less manual accounting, more peace of mind and fewer nasty surprises at tax time. Try it free today.