Contractor and Recruitment Agency Tax Obligation Changes

This post is by Sheral Reddy, an experienced Associate Director at GECA Chartered Accountants

Are you a contractor? Or a recruitment agency? If so, there are a number of changes to the way contractors are now taxed which will impact you.

Back in April 2017, there were two main changes to scheduler payments (formerly known as withholding taxes). This was announced as part of the Government budget for the 2016 year and is a new tax measure for businesses.

Firstly, Contractors who work through a recruitment agency or labour hire business now have their tax deducted automatically. These agencies or labour hire businesses are required to pay contractors the net amount and forward the tax deductions to IRD together with the employer monthly schedules. If this is not done or is done incorrectly, the recruitment agency will incur filing penalties, fines and use of money interest.

• If the payment is submitted late, an initial 1% late payment penalty on the day after the due date is charged.
• At the end of the 7th day from the due date, if there is still an amount of unpaid tax, a further 4% penalty will be charged.
• Every month after the due date, a further 1% will be charged on the outstanding balance including the penalties.
• If tax is not deducted from your contractors and forwarded to IRD even though an employer monthly schedule has been filed, a 10% non-payment penalty will also be charged.

Only one monthly schedule is required to be filed each month to the IRD. Therefore, if running different systems, a manual return will be required to be filed combining the different systems. We suggest considering moving all employees and contractors to one payroll system to make the preparation of the PAYE returns and employer monthly schedules more efficient.

If the tax payments for the year are in excess of $500,000, the Recruitment agency or Labour Hire business will be required to file the PAYE and employer schedule twice each month. Tax calculations will be based on the actual pay date and it will create problems for the contractor and when filing the returns if the pays are backdated.

The Tax Rate Notification form

A Tax Rate Notification form (IR330C) is required to be completed by every contractor subject to the schedule payment rules. Contractors will be required to select the withholding tax rate based on a projection of total annual earnings which best fits their tax position.

If an IR330C form is not provided by the contractor, the withholding tax rate of 45% will be applied. Even if the work was completed before 1 April, 2017 – tax must now be deducted.

Recruitment companies or Labour Hire businesses need to ensure they are compliant and there are penalties for getting it wrong. We suggest seeking advice from us on this tax change to understand its implications on your business and your contractors, and ensure your processes and systems are able to meet the tax obligations.

It is important to have a payroll system that does calculate the tax for your contractors at the different rates. We also suggest having a discussion with your contractors to talk about the potential implications on their income and answer any concerns they may have.

Although the contractors are responsible for determining the tax rate by way of the IR330C form. It isn’t clear whether the Recruitment Agency or Labour Hire business is responsible for checking and confirming that the rate elected is correct.

However, the Recruitment Agency or Labour Hire business is responsible for deducting the correct withholding tax rate, if they are aware that the rate elected by the Contractor does not fit the tax liability of the contractors projected annual income.

Secondly, contractors who aren’t already required to have tax deducted from their payments have the option to have tax deducted.

Exemptions

There are certain contractors who are exempt from this rule where the contractor is unable to elect their own withholding tax rate. They are as follows:

• The commissioner can prescribe a rate of Withholding tax where a contractor has not met a liability
• Minimum of 15% for Non-resident contractors and contractors with temporary work visas and 10% for all other contractors
• The consent from the Recruitment Agency or Labour Hire business is required if a contractor has changed their rate twice in a 12-month period.

In summary, the tax change and the implications needs to be communicated to all your contractors. The IR330C forms needs to be distributed to your contractors and you will need to ensure that the correct rates have been elected and the forms are completed.

Each month, you will need to ensure the correct payments are being made to the contractors and correct withholding tax is being deducted.

How we can help

At GECA we offer payroll services together with our expertise in tax and accounting services. We are able to calculate and pay your contractors withholding tax accurately with the IRD. We have experienced staff that can assist with resolving any queries that you or your contractors may have.

By using us for your payroll requirements we will be able to do the following on your behalf:

• Ensure that your contractors have completed and provided the required forms and documents
• Review your current contracts in place with your contractors and make any recommendations or assist you with any contracts that needs to be put in place
• Setup a new payroll system
• Calculate, deduct and pay the appropriate Withholding Tax to IRD together with the required returns
• Assist with communicating these changes to your contractors
• Review if the appropriate contractor withholding tax rates are being elected and monitor this rate
  We will also be able to assist your contractors with their end of year accounts and tax returns.

You will save time and costs by using us for your payroll services. Please contact us today for a complimentary, no obligation discussion of your requirements.