Contractor or employee: what each costs the business a year
An employee costs their salary plus at least 3.5% KiwiSaver, ACC levies and other costs, for 52 paid weeks, of which about 45 are worked once holidays and sick days come out. A contractor bills only the hours worked, excluding GST if you are registered. The calculator compares the two for the same hours of work and gives the contractor rate where they cost the same.
Worked out for the example. Change the boxes to make it yours.
| Employee: salary | $95,000 |
|---|---|
| Employer KiwiSaver: 3.5% | $3,325 |
| ACC levies at $0.10 per $100 | $95 |
| Other employee costs | $3,000 |
| Employee: cost a year | $101,420 |
| Hours paid (40 hours a week for 52 weeks) | 2,080 hours |
| Less 4 weeks' annual holidays, 12 public holidays and 5 sick days | 296 hours |
| Hours actually worked a year | 1,784 hours |
| Employee: cost for each hour worked | $56.85 |
| Contractor: 1,784 hours at $85.00 | $151,640 |
| Contractor: cost a year for the same hours | $151,640 |
| Contractor: cost for each hour worked | $85.00 |
| The contractor costs more a year by | $50,220 |
| Break-even contractor rate | $56.85 an hour |
| The salary as a plain hourly rate (52 weeks) | $45.67 an hour |
- An employee is paid for 52 weeks but works fewer: annual holidays, public holidays on their working days and sick days are paid days off. A contractor bills only the hours worked, so the comparison is cost for each hour worked.
- The contractor's rate is compared without GST, because a GST-registered business claims back the GST on the invoice.
- A contractor pays their own tax and ACC levies, and gets no employer KiwiSaver, paid holidays or sick leave. If their work is a schedular payment activity, you usually deduct withholding tax from what you pay them; that comes out of their rate, not on top of it.
- Whether someone is a contractor is not decided by cost or by the agreement's label alone: the gateway test from 21 February 2026, or the real nature of the relationship, decides it.
Team timesheets shows the hours staff choose to share, by person, project and task, with a CSV ready for payroll. Optional approvals, billable and private cost rates, hours budgets and team invoices are all included in the seat. It never reads the pay or rates in anyone's own account.
See Team timesheetsWhy the comparison is by the hour worked
A salary pays 52 weeks. Out of them, the Holidays Act 2003 gives at least 4 weeks of paid annual holidays (section 16), a paid day off for each public holiday that falls on a working day (section 49) and 10 days' sick leave a year after six months (section 65). The example's employee is paid for 2,080 hours and works 1,784 of them. A contractor invoices only the hours they work and has no paid leave, so the honest comparison is the cost of each hour worked. On top of the salary, the employer pays KiwiSaver of at least 3.5% of gross pay for a contributing employee, rising to 4% on 1 April 2028, and ACC levies at its industry's rate plus the Working Safer levy, to $156,641 of earnings in 2026/27. Our cost of an employee calculator breaks the employee side down further.
GST and withholding tax on the contractor's side
If your business is registered for GST, Inland Revenue lets you claim back the GST you are charged on goods and services used in your taxable activity, so a contractor's rate is compared excluding GST. If you are not registered and the contractor is, the 15% is a real cost and the calculator adds it. Some contractors' work is a schedular payment activity, mainly supplying labour, and in most cases you deduct withholding tax from what you pay them. That comes out of their rate, not on top. Contractors pay their own income tax and ACC levies and get no employer KiwiSaver. Our guide to contractor tax covers their side.
Cost does not decide status
Since 21 February 2026, section 6(7) of the Employment Relations Act 2000 has a gateway test. Someone is a specified contractor, not an employee, if all five hold: a written agreement says they are an independent contractor or not an employee; they can work for others; they need not be available at set times or for a minimum period, or they can subcontract; the arrangement cannot end because they decline extra work; and they had a reasonable chance to get independent advice first. If the test is not met, the Employment Relations Authority or the court looks at the real nature of the relationship, and a label alone does not decide it. Someone found to be an employee is owed the minimum wage, holidays and leave. Our glossary entry on employee or contractor and our article on contractor timesheets and the gateway test explain more.
What the numbers leave out
The calculator compares cost, not value. A contractor can stop when the work does, which suits a project or a peak; an employee costs the same in a quiet month, and builds knowledge the business keeps. Hours worked are the same on both sides here; if a contractor would need fewer hours for the same work, or an employee would take time to learn the job, change the hours or add the cost. Our article on contract rate against salary shows the same comparison from the worker's side.
Questions
Is it cheaper to hire a contractor or an employee in NZ?
It depends on the rate and the work. Compare the cost of each hour actually worked: an employee's salary, KiwiSaver, ACC and other costs over the hours left after holidays and sick days, against the contractor's rate excluding any GST you claim back. A contractor can cost less for short or uneven work, because you pay only for the hours you need.
What contractor rate equals a salary?
Divide the employee's full yearly cost, with KiwiSaver, ACC and other costs, by the hours they actually work after holidays and sick days. In the example, $101,420 over 1,784 hours is $56.85 an hour, against $45.67 for the salary divided over 52 weeks.
Do I pay KiwiSaver or ACC for a contractor?
No. Contractors pay their own ACC levies and income tax and get no employer KiwiSaver contributions. If their work is a schedular payment activity, you usually deduct withholding tax from their payments, which comes out of their rate.
Do I pay GST on a contractor's invoice?
If the contractor is GST-registered, their invoice includes 15% GST. A GST-registered business claims it back, so the real cost is the rate excluding GST. If your business is not registered, the GST is part of your cost.
What is the gateway test for contractors?
From 21 February 2026, someone is a contractor rather than an employee if all five criteria in section 6(7) of the Employment Relations Act 2000 are met: a written agreement saying so, freedom to work for others, no set times or minimum hours (or a right to subcontract), no ending the arrangement for declining extra work, and a chance to get independent advice. Otherwise the real nature of the relationship decides.
Can I see the hours contractors and staff work on a project?
Team timesheets at jobtracker.co.nz shows the hours people on your team's seats choose to share, by person, project and task, with a CSV ready for payroll. The Owner and Admins can add a private cost rate for each person and see cost and margin by project; it never reads the pay or rates in anyone's own account.
Sources
- Employment New Zealand: employee or contractor.
- Employment Relations Act 2000.
- Employment Relations Amendment Act 2026.
- Holidays Act 2003.
- Inland Revenue: employer contributions to KiwiSaver schemes and complying funds.
- Inland Revenue: KiwiSaver changes.
- Inland Revenue: claiming GST.
- Inland Revenue: charging GST.
- Inland Revenue: schedular payments.
- business.govt.nz: ACC levies.
- Accident Compensation (Work Account Levies) Regulations 2025, Schedule 2: rates for 2026/27.
- Health and Safety at Work (Rates of Funding Levy) Regulations 2016.
More free tools: see all the calculators.