Sole trader or company? Choosing a structure as an hourly contractor in New Zealand

Sole trader or company: tax, ACC, paperwork and liability

As a sole trader, you and the business are one person. Your contracting profit is your income, taxed at the individual rates in the Income Tax Act 2007, and you file it on your own tax return:

A company is different. Under the Companies Act 1993 it is a legal entity in its own right, it pays income tax at a flat 28% on its own profit, and you are paid by it. That gap between 28% and the top personal rates of 33% and 39% is why the question comes up at all.

The other differences:

• Liability. A sole trader's business debts are their own. A company's debts are the company's, and a shareholder is not liable for them just because they hold shares. That protection does not cover anything you sign personally, such as a guarantee, and a director has duties of their own.
• ACC. According to business.govt.nz, a sole trader is automatically on ACC's CoverPlus and is invoiced after filing a tax return, or can choose CoverPlus Extra to set how much income is covered. A company pays the work levy for the people it pays and deducts the earners' levy through PAYE.
• Paperwork and cost. A company needs at least one share, one shareholder and one director who lives in New Zealand. The Companies Office lists a $10 name reservation and $118.74 to incorporate, both plus GST, and every year an annual return of $49.74 plus GST. Then come the company's own bank account, accounts and tax return, usually with an accountant's fee.

Our guide to contractor tax in New Zealand covers what a sole trader sets aside for tax, ACC, student loan and GST.

The personal services attribution rule

The rule is in sections GB 27 to GB 29 of the Income Tax Act. Inland Revenue says its purpose is to stop people avoiding higher personal tax rates by routing their work through a company, trust or partnership. It applies when all of these are true for the year:

• a client buys services from your company, and you personally perform them;
• 80% or more of the company's income from personal services comes from that one client (and people associated with it);
• 80% or more of that income comes from work done by you (and your relatives);
• your net income, counting the attributed amount, is more than $78,100; and
• substantial business assets are not a necessary part of the business. That means depreciable property, not for private use, costing more than $75,000 or 25% of the company's income from services for the year.

When it applies, section GB 29 treats the company's net income from your services as your income, taxed at your rates. The company first deducts the salary it paid you, and dividends it pays you from that year's income within six months of year end reduce the amount too. There is no attribution if the amount would be under $5,000, or to the extent your work is essential support for a product the company supplies.

One figure has moved. Inland Revenue's page on the rule, last updated in 2021, still gives the income threshold as $70,000. The Act was changed to $78,100 from 1 April 2025, matching the top of the 30% tax bracket.

For an hourly contractor with one main client, the first three tests are usually met by definition. That is why a company rarely shelters much tax for someone in that position, and why the share of income each client provides is worth watching.

Paying yourself from a company

A company's money is not yours until it pays you, and there are three main ways it does.

• Shareholder salary. Under sections RD 3B and RD 3C, a shareholder who works in a close company can, if the conditions fit, elect to be paid a salary with no PAYE taken off, often set after the year ends, or a regular PAYE salary topped up later. Salary with no PAYE goes on your own return, and you pay the tax yourself.
• Dividends. The company pays out profit it has already been taxed on. Inland Revenue explains that the company attaches the tax it paid as imputation credits, which reduce your own tax on the dividend, so the profit is not taxed twice.
• The current account. Money you take out during the year is usually recorded in a shareholder current account. If you take out more than you have put in or been paid, the account is overdrawn, which Inland Revenue treats as the company lending you money, and charging less than the prescribed or market interest rate may bring fringe benefit tax or dividend consequences.

Provisional tax follows from all of this. Inland Revenue requires it of anyone who had more than $5,000 of tax to pay at the end of the year on their last return, and with a company, that can mean you and the company each paying instalments.

Schedular payments and GST under each structure

As a sole trader whose work is one of the kinds listed for schedular payments, your client takes tax off each payment at the rate you choose on the IR330C form. Our contractor tax guide explains the rates.

A company is treated differently. Under section RD 8 of the Income Tax Act, a payment for services provided by a company is generally not a schedular payment, so your company is paid in full and has to provide for its own tax through provisional tax. There are exceptions worth knowing. If you contract through a recruitment or labour-hire agency that places you with its client, payments to your company are labour-hire payments with a standard rate of 20%. And a client and your company can agree in writing to treat payments as voluntary schedular payments, also at 20%.

GST works the same way for both, but each is a separate person. You must register once your turnover was at least $60,000 in the last 12 months, or you expect it to be in the next 12, and you can register below that. A company registers in its own name, which the Companies Office lets you request when you incorporate, so switching from sole trader to company means a new registration and new invoices from the company. Our guide to invoicing as a contractor covers what an invoice needs.

A worked comparison at 1,400 billable hours

This is a made-up example using the 2026/27 income tax rates and the ACC earners' levy at 1.75% (capped at $156,641), with no KiwiSaver or student loan. A contractor bills one client $100 an hour, before GST, for 1,400 hours, which is $140,000. After $6,000 of business expenses, the net income is $134,000.

As a sole trader, the income tax on $134,000 is $34,097.50 and the earners' levy is $2,345, which leaves $97,557.50 before the ACC work levy, which depends on your kind of work.

Through a company, with that one client, say the company pays a salary of $78,100 and keeps the other $55,900. The salary carries $15,650.50 of income tax. Every attribution test is met: one client, all the work is the contractor's own, net income well over $78,100 and no substantial assets. So the $55,900 is attributed and taxed as the contractor's income at 33%, which is $18,447. The total income tax is $34,097.50, exactly as a sole trader, plus the annual return fee and the accountant.

Through a company, with several clients, where none provides 80% of the income, the rule does not apply. The $55,900 is taxed in the company at 28%, which is $15,652, or $2,795 less than at 33% in that year. It is still not tax free. When the company later pays the money out as a dividend, the imputation credits count towards your tax and you pay the rest at your own rate in that year. The company changes when the tax is paid, and whether it is paid at a lower rate depends on your income in the year the money comes out.

So the real test is your client mix, and that is easy to lose track of over a year. Your Timesheets at jobtracker.co.nz logs your hours free on every plan, and with the Career and Timesheets plan each client becomes a project with its own rate, so the reports show what each client's work earned and how close one client is to 80% of the total. It is a record, not tax advice: an accountant who knows your plans should make the call. Our article on contracting as a career covers the wider decision, from pipelines to building a client base.

Keep every client's hours and earnings apart