Although this means schedular payments are a bit like getting a salary or wages, the way the deductions are calculated are quite different. 

To help you understand more about schedular payments and withholding tax, below you’ll find a quick summary of who they apply to, how they work and some important things to get right.

Who normally receives schedular payments?

The schedular payment rules usually apply to freelancers and contractors who are providing services or labour-only work, rather than working for a salary or wages. It also applies to people contracted to a recruitment, temping or labour hire company and working for clients of the labour-hire company.

Generally, the schedular payments rules don’t apply if you provide services through a company.  The more common exceptions are if you provide services to a labour-hire company or you voluntarily opt-into the rules.

Common examples include:

  • A freelance content writer paid to write blog posts or articles for a client
  • A self-employed salesperson paid a commission
  • A builder or labourer paid by a labour hire business
  • A project change manager or IT specialist contracted by a recruitment company to one of their clients 
  • A partnership contracted to provide training or professional development courses

Opting out with an exemption certificate

If you don’t want to receive schedular payments, with withholding tax already deducted, you can apply to Inland Revenue for a certificate of exemption (COE).  You show the certificate toto your payer and they won’t deduct withholding tax from the payment.  Generally, Inland Revenue will issue you with a COE if you have a good tax history – i.e. filed tax returns and made all tax payments on time over the last 24 months.

Asking for voluntary schedular payments

You and the payer can agree in writing to have withholding tax deducted from a payment which falls outside the schedular payments rules.  You may wish to do this if you want to reduce or eliminate your provisional tax obligations. 

What tax rate is used for schedular payment withholding tax?

You will need to complete an IR330C form (available from the Inland Revenue website) before you receive any schedular payments and provide it to the payer.  The form is called a “Tax rate notification for contractors” form and you will need to complete one for each payer.

You use this form to tell each payer the withholding tax deduction rate you’d like them to use for the schedular payment.  The lowest rate is 10% for New Zealand resident taxpayers. The form includes a list of activities with standard rates of withholding tax. Remember these are suggestions only – you can elect to use another rate . 

If for some reason you don’t complete an IR330C to let your payer know your tax rate, they will use the non-notified rate of 45%. You would rather avoid that, even though you would eventually get the over payment refunded by filing an end-of-year tax return.

How are schedular payments and withholding tax covered in your tax returns

If you’ve earned self-employed income, you will need to complete an IR3 individual tax return each year. You use this to record income from all sources and business-related expenses that can be claimed for tax purposes. Your income minus your expenses equals your net profit or loss.  . You calculate your tax to pay on your net profit less losses brought forward, then subtract any tax already paid through PAYE (if you’ve also been paid by an employer) and other tax credits including withholding tax. The result is your tax-to-pay or refund.

Top tips for schedular payments and withholding tax

In this section we provide some tips to help you avoid a few mistakes people often make with schedular payments.

Avoid choosing a rate that’s too low

It’s almost impossible to choose exactly the right rate, because you probably don’t know how much profit you’ll earn during the year and what your overall tax rate will be. However, choosing a very low rate to put off paying Inland Revenue can have its perils::

  • You may not have put enough aside during the year and may struggle to pay your tax bill.
  • If your tax bill (residual income tax) at the end of the year is more than $5,000, you’ll have to start paying provisional tax. That will mean paying tax for the current year in installments during the year.

Take care with GST calculations

If you expect to earn more than $60,000 a year from self-employed income, you have to register for GST. That means you must include GST in your invoices to your customer on top of the schedular payment.  You must also account for GST in your GST returns.

Here’s an example, with nice round numbers, that’s commonly used to explain this.

  • Services ex GST: $1,000
  • 15% GST: $150
  • 20% WT: – $200
  • Net payment received: $950 (Service charge plus GST and minus the withholding tax on the ex GST charge) 

A mistake can occur if you or the accounting software calculates the GST collected based on the $950 you received. This would be $123.91, but it should be $150.

Don’t forget your other self-employed tax obligations

Withholding tax on schedular payments is only an interim tax until your final tax liability is determined after filing an income tax return. You still have to take care of the other payments related to earning that self-employed income yourself. These include ACC payments, student loan repayments and GST (if you’re GST registered). It’s important to know what these will be and set money aside as you earn, whether or not you’re also earning PAYE income from an employer.

Next steps

When you’re earning self-employed income, there’s a lot you have to take care of that an employer normally does for their employees. It’s important to talk with Afirmo, to ensure you have the best set up for your situation.

Afirmo’s tools make this really easy. The Business Set up and Tax Tegistration Tools guide you to a great start. Then the Money and Tax Tools make it easy for you to stay on top of your invoicing, finances and tax obligations. 

Best of all, Afirmo’s not just for sole traders. If your business grows into a limited liability company or a partnership, Afirmo will keep supporting you all the way. Check out Afirmo’s tools today.