Contractor vs employee: your real hourly rate

What you give up as a contractor

The trap with comparing salary to an hourly contract rate is that the salary number quietly bundles in a long list of things your employer pays for that you'd otherwise pay for yourself. Strip them out and the salary suddenly looks more generous than it did on the offer letter.

For a typical NZ employee on a Monday-to-Friday contract, the bundle includes:

On top of those direct dollar items, an employee also gets bereavement leave, parental leave entitlements, the protection of the unjustified dismissal regime, paid training time, equipment (laptop, phone, software licences), a desk to sit at, and the legal floor of the minimum wage. None of those translate to neat numbers, but they all cost real money to replace as a contractor.

The honest summary: if you sign a contract for the same dollar number as your salary, you've taken roughly a 20–25% pay cut on day one — before tax even enters the conversation.

WT, IR330C, ACC and GST in 60 seconds

New Zealand contractors aren't taxed at a different rate to employees — there's no "self-employment tax". The same PAYE brackets (10.5% / 17.5% / 30% / 33% / 39%) apply. What differs is how tax is collected and what extra levies you wear personally.

Withholding Tax (WT) and the IR330C

If you do "schedular work" — labour-only contracting in IT, construction, design, commission sales, directors' fees and a long list of other categories — the firm paying you is legally required to withhold tax from your invoices at the rate you nominate on form IR330C. The minimum self-elected rate is 10% for residents (15% for non-residents). If you don't supply an IR330C at all, the payer must withhold at the punitive no-notification rate of 45%.

WT is a prepayment, not a final tax. At year end you file an IR3, your full income gets dropped into the PAYE brackets, and you either get a refund or a top-up bill. Pick the WT rate close to your expected effective tax rate so you're not lending IRD an interest-free loan or facing a nasty April surprise.

ACC — the bit most people miss

As a self-employed person you pay both the ACC Earners' Levy (1.45% on income up to $152,790, same as PAYE workers) and the ACC Work Account levy that an employer would normally pay. The Work levy varies by Classification Unit (CU) — an office-based consultant pays around 0.30–0.50%, while a roofer or builder can be 1.5%+. ACC issues an annual invoice based on your IR3 income. Budget for it; it bites every August.

GST

You must register for GST once your self-employed turnover crosses NZ$60,000 in any rolling 12-month period. Once registered you charge 15% on top of your fees, claim 15% back on business expenses, and file a return every two months (for most). GST is collected on behalf of the IRD — it's not your money — so the easy mistake is spending it. Keep it in a separate savings account from day one.

KiwiSaver

You can keep contributing voluntarily, but there's no employer match. To collect the maximum government contribution of $521.43 you need to put in at least $1,042.86 between 1 July and 30 June each year — easy to forget when there's no payroll doing it for you.

Worked example: matching a $90,000 salary

Let's price an actual swap. Sarah is on $90,000 base salary, contributing 3% to KiwiSaver, no student loan. She's been offered a 12-month IT contract and wants to know what hourly rate makes her at least no worse off.

What her salary is really worth to her employer

What that means as an hourly rate

A salaried Kiwi gets roughly 260 weekdays a year, less 20 days annual leave, 11 public holidays and an average ~10 sick days — about 219 productive working days, or 1,752 hours. To clear Sarah's true cost-to-employer figure, a contractor needs to bill:

So the recruiter offering "$80 an hour to leave your $90k job" is, on a like-for-like basis, offering Sarah a small pay cut once you account for everything she's giving up. The right counter is somewhere in the $70–$80 range, depending on how much risk and admin she's willing to wear personally.

Sarah's take-home as an employee on $90k (3% KiwiSaver, no student loan) works out to $66,220 a year, or about $1,273/week. Any contract rate that doesn't comfortably exceed that, after all the contractor expenses are paid, isn't a real pay rise.

A reusable rule-of-thumb formula

For any salary you're trying to convert, the back-of-envelope formula is:

That collapses to a simple shortcut most NZ contractors quietly use: multiply your annual salary by ÷ 1,000 and add 10–15. So a $90k salary → ~$90 + $15 = ~$105/hr. A $120k salary → ~$120 + $15 = ~$135/hr. Surprisingly close to the precise calculation for most office-based roles.

The formula breaks down at the top end (where leave loading shrinks as a percentage of total package) and for high-risk trades (where ACC Work levies are 4–5x office rates). For trades, builders, electricians and similar, add another 10–15% to cover the levy gap.

When contracting actually pays

None of this is to say contracting is a bad deal — millions of New Zealanders do it happily, and there are real financial advantages once you clear the breakeven hurdle. The honest list:

Legitimate business expense deductions

Home office percentage, professional development, accountant fees, software subscriptions, business travel, a portion of phone and internet — all deductible against your gross income, lowering the figure that gets taxed in the brackets. A salaried employee can deduct essentially nothing.

Income smoothing through a company structure

Once you're consistently earning above ~$80k as a contractor, an accountant will usually suggest setting up a limited company. Income that stays in the company is taxed at a flat 28%, instead of the 33%–39% personal rates. Pulled out as shareholder salary it lands in your personal IR3, but you control the timing.

Higher hourly rates than equivalent salary roles offer

In high-demand fields (senior software engineering, specialist trades, healthcare locums), market contract rates routinely sit 20–40% above the equivalent salary's effective hourly value. That's where the real upside lives — but only if you can keep the desk full.

Control over how, when and for whom you work

The non-financial bit. Pick your clients, set your hours, take an unpaid month off without asking permission. For a lot of people that's worth more than the dollars.

Quick answers

Should I be a sole trader or a company?

Below ~$70k of contracting income, sole trader is usually fine — simple, cheap, all income flows through your personal IR3. Above that, the 28% company rate starts to make a company worth the ~$1,000/year compliance overhead. Talk to an accountant before incorporating; the right answer depends on whether you're saving, splitting income with a spouse, or planning to scale.

What WT rate should I pick on my IR330C?

A common starting point for a resident contractor on roughly $90k–$120k expected annual income is 20%. That covers your effective tax rate plus a small buffer for ACC. If you're on lower income or have lots of deductible expenses, 15% is reasonable. Avoid 10% (the legal floor) unless you're absolutely sure your year-end tax bill will be tiny — getting hit with provisional tax later is unpleasant.

Do I need to register for GST from day one?

Only if you expect to cross $60k of self-employed turnover in your first 12 months. If you're starting part-time or hedging your bets, wait — once you register you have to file returns even when you're below the threshold. If you cross the threshold mid-year, you must register within 21 days.

Am I really a contractor, or a "disguised employee"?

IRD and the Employment Relations Authority both apply a "real nature of the relationship" test. If you work set hours for one client, use their equipment, can't subcontract the work and have no other clients, you're probably an employee in legal effect — and entitled to all the leave, KiwiSaver and protections that go with it. The MBIE has a free decision tool worth running before you sign anything labelled "contract".

How much should I keep aside for tax?

A safe rule of thumb: 30% of every invoice into a separate savings account, plus another 15% if you're GST-registered (because that 15% isn't yours). At year end you'll typically have a small surplus rather than a deficit, which is exactly the position you want to be in.