Contractor or employee? What each really costs a New Zealand business, and the 2026 gateway test

Every growing business reaches the point where the owner can’t do all the work. The next question usually arrives as a quote: a contractor at $55 an hour plus GST, against a job ad at $34. The wage looks much cheaper, but often isn’t.

The honest comparison isn’t rate against rate. It’s a fixed cost against a variable one, and the deciding figure is how many hours of real work you have. Since February, there’s also a new legal test that decides whether a contractor arrangement stands up. Both are worth sorting out before you sign anything this spring, while there’s time to plan for the summer peak.

Why is a contractor’s rate so much higher than a wage?

Because the contractor carries every cost you’d otherwise carry as an employer, plus the risk of gaps between jobs. Employment New Zealand notes that a contractor “generally pays their own tax directly to IRD” and pays their own ACC levies. Their rate also has to cover:

• Leave they don’t get paid for. No annual holidays, public holidays or sick leave, so the rate has to fund roughly six weeks a year of not earning.
• Retirement savings. No employer KiwiSaver contribution.
• ACC. Their own levies, invoiced to them.
• Tools, vehicle, phone and insurance. Usually theirs, not yours.
• Downtime. Quoting, admin and the weeks when nobody’s booked them.

So a contractor charging well above an employee’s wage isn’t necessarily overcharging. They’re pricing like a business, which is exactly what our guide to setting a charge-out rate tells you to do.

What does an employee actually cost per year?

The wage is the starting point, not the total. On top of gross pay you have KiwiSaver employer contributions (at least 3.5% from 1 April 2026, rising to 4% from 1 April 2028), the ACC work levy, and paid time when no work gets done. Our page on the true cost of an employee works through the full list. For this comparison, three things matter:

Cost item	Employee	Contractor
Hourly cost	Wage	Agreed rate (plus GST, claimable if you’re registered)
KiwiSaver	At least 3.5% of gross pay	None
ACC	Your work levy, based on payroll	Theirs
Annual, public and sick leave	You pay, no output	Not paid
Quiet weeks	You still pay the wage	You pay nothing
PAYE and payday filing	Yes, every payday	Only if schedular payments apply

The key line is “quiet weeks”. An employee costs the same in a slow July as in a flat-out November. A contractor costs nothing when there’s no work. That’s what the break-even calculation captures.

How do you work out which is cheaper?

Use one division:

Break-even hours = employee’s full annual cost ÷ contractor’s GST-exclusive hourly rate

If you expect fewer paid hours of work than the break-even figure, the contractor is cheaper. If you expect more, the employee is. Use the GST-exclusive rate if you’re GST-registered, because you claim the GST back. If you’re not registered, use the GST-inclusive figure, because that’s what it really costs you.

Two refinements make the answer more honest:

1. Count only productive hours for the employee. A 40-hour employee is paid for about 2,080 hours a year but, after annual holidays, public holidays and some sick leave, is typically on the tools for around 1,790. Our holiday pay basics page explains where those hours go.
2. Be realistic about your work pipeline. Use last year’s job sheets, not the best month you can remember.

An illustrative example: a Hamilton landscaping firm

This is a made-up example to show the arithmetic, not a real business. The ACC figure is a placeholder; yours depends on your classification unit.

A two-person landscaping business in Hamilton is GST-registered and turning work away. The owner is choosing between an employee at $34 an hour for 40 hours a week, or a contractor at $55 an hour plus GST.

Employee: annual cost	Amount
Wages, 2,080 hours at $34	$70,720
KiwiSaver employer contribution at 3.5%	$2,475
ACC work levy (placeholder)	$1,200
Total	$74,395

Break-even: $74,395 ÷ $55 = about 1,353 hours a year, or roughly 26 hours a week averaged across 52 weeks.

Work actually available	Contractor cost (excl GST)	Employee cost	Cheaper option
900 hours (busy season only)	$49,500	$74,395	Contractor, by $24,895
1,353 hours	$74,415	$74,395	About even
1,790 hours (full-time, all year)	$98,450	$74,395	Employee, by $24,055

The firm’s records show solid work from September to April and patchy work over winter, about 1,100 hours in total. On cost alone, the contractor wins. If the firm grows to year-round demand, the employee becomes the better deal, and the owner gets someone who can be rostered and trained.

There’s also a timing difference. The employee is paid weekly, and PAYE and KiwiSaver deductions go to Inland Revenue by the 20th of the following month. The contractor invoices, perhaps monthly on 20th-of-the-month terms, and the firm claims the GST back in its next return. That gives the firm a few weeks’ more breathing room on each dollar spent. If a busy season means carrying wages or contractor invoices before the customers pay, it’s worth checking what funding you could qualify for before the peak, not during it.

What is the 2026 gateway test, and why does it matter?

Getting the label wrong costs money. If someone you’ve treated as a contractor turns out to be an employee, Employment New Zealand points out that they may have missed out on entitlements such as annual holidays, sick leave and KiwiSaver, and may have paid tax and ACC they shouldn’t have had to. That’s a liability you’d be facing.

The Employment Relations Amendment Act 2026 added a gateway test, in force from 21 February 2026. According to Employment New Zealand, a worker is a contractor if all five of these are true:

Criterion	What it means in practice	Where small businesses trip up
1. Written agreement	It says they’re an independent contractor or not an employee	A handshake, or an agreement that only lives in emails
2. Free to work for others	They can take other clients, just not at the same time as working for you	An exclusivity or no-competitor clause
3. Control over timing, or can subcontract	They choose when they work, or can send someone else (vetting only for legally required qualifications)	Putting them on the weekly roster with set start times
4. Can decline extra work	Turning down an extra job doesn’t end the arrangement	“If you can’t do Saturdays, we’ll find someone who can”
5. Chance to get advice	They had a reasonable opportunity to get independent advice before signing	Signing on the first morning, on the ute bonnet

If all five are met, the worker is a contractor and can’t later argue otherwise. If any one is missed, it’s not automatically employment. Employment New Zealand says “the common law test applies”, which weighs intention, control, integration into your business and economic reality. That older test is case by case and harder to predict.

The test isn’t retrospective. For arrangements that began before 21 February 2026, the common law test covers the earlier period, and both tests apply from that date. If you have long-standing contractors, now is a good time to check the agreements against the five points.

The practical shortcut: if the business needs someone at set times, doing what they’re told, the way they’re told, plan and budget as if you’re hiring an employee. The contractor model works best when the work is project-shaped and the person really does run their own show.

Do you need to deduct tax from a contractor?

Sometimes. Inland Revenue’s schedular payment rules cover certain kinds of work, “mainly involving the supply of labour”. If the work is a schedular activity, the contractor gives you an IR330C form with their chosen rate and you deduct tax from each payment. If they don’t provide one, Inland Revenue says to deduct at the 45% no-notification rate (20% for a non-resident contractor company). Deductions are paid with your other employer deductions.

Contractors outside those rules can agree with you in writing to receive voluntary schedular payments. Inland Revenue lists a standard rate of 20% unless the contractor chooses another rate. Some contractors like this because it stops a big tax bill landing at the end of the year. It also means you’re registered as an employer and filing, so factor in the admin.

For GST, Employment New Zealand notes that a contractor “must register for GST” once they earn over $60,000. Expect most full-time contractors to add 15% to their invoices. You’ll claim it back, but you’ll pay it out first, so allow for that timing in your GST and provisional tax set-aside planner.

A quick checklist before you decide

• Count last year’s real hours of work for this role, month by month.
• Work out the employee’s full annual cost, including KiwiSaver and your ACC levy.
• Divide by the contractor’s GST-exclusive rate to get your break-even hours.
• Ask whether you need to control when and how the work is done. If yes, lean towards an employee.
• If you go with a contractor, make sure the written agreement covers all five gateway criteria, and give them time to get advice.
• Check whether schedular payments apply and get an IR330C before the first invoice.
• Map the cash timing: weekly wages versus monthly invoices, and when GST comes back.

Whoever you hire, the cash goes out before it comes back

Hiring is what growth looks like from the inside. It’s also the point where cash gets tight, because wages or contractor invoices start straight away, while the extra revenue arrives weeks or months later. As our feature on why growth eats cash explains, a busy business can still run short in the middle of its best season.

That’s where we come in. We help New Zealand owners fund the gap between taking on people and getting paid for their work. That might be unsecured or cash-flow funding for trading businesses, typically $5,000 to $500,000 and sized on turnover and bank statements, or property-secured lending from $20,000 to $5,000,000. Bad credit and IRD debt are considered case by case, and lending is for business purposes only.

Enquiring takes about 60 seconds, and there’s no credit check when you first enquire. Your details aren’t sent to a pile of lenders, so your phone won’t light up with strangers. A real person reads what you’ve told us about your hiring plans and the season ahead, then calls you to talk it through. Please fill the form in accurately, especially turnover and the amount you need, so we can match the right option first time.

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