With the news in the Budget 2025 that KiwiSaver employer contribution rates are to be increased to 4% from 1 April 2026, it’s worthwhile considering how this impacts an equivalent salary calculation for comparing employees with contractors. While contractors can offer flexibility, hiring employees often provides stability and control. However, the choice has significant implications for both parties, including legal, financial and operational factors.
Calculating an equivalent salary or payment for contractors
One of the first steps in deciding between hiring a contractor or an employee is understanding the cost implications. Contractors often charge higher rates to account for their lack of employment benefits, taxes and additional responsibilities. To calculate an equivalent contractor rate or salary:
1. Identify the base salary for an employee: Begin with the annual salary an employee would earn.
2. Factor in employer costs: Add costs such as:
- Holiday pay (i.e. at least 8% of the annual salary)
- Public holidays 4.5%
- KiwiSaver contributions (soon to increase to 4% of the salary)
- Sick leave 4%
- ACC around 2%
- Total: 22.5%
3. Adjust for contractor responsibilities: Contractors are responsible for their own taxes, equipment and insurance, so their rates should reflect these additional costs.
Example calculation:
If the annual salary for an employee is $80,000:
- Add 22.5% for benefits and employer obligations: $80,000 × 1.225 = $98,000
- Divide by annual work hours (e.g., 2,080 hours for full-time): $98,000 / 2,080 = $47.12/hour
Thus, an equivalent contractor rate would be approximately $47/hour without adjusting for additional responsibilities.
Legal factors to consider
Classifying someone as a contractor or employee isn’t just a tax decision – it has legal implications. There’s been ongoing controversy in New Zealand and overseas (e.g. Uber cases) over how gig and contract workers should be treated. Misclassification can lead to penalties, backdated PAYE and ACC and employment entitlements.
Key tests used by NZ courts
- Control: Who decides how, when and where the work is done?
- Integration: Is the work part of the core business?
- Tools & equipment: Who supplies them?
- Continuity: Is the relationship ongoing or project-based?
- Intention vs reality: What’s written in the contract matters less than what happens in practice.
Possible legal changes
In September 2024 the government announced upcoming amendments to the Employment Relations Act to give businesses and contractors greater certainty. A new gateway test will be introduced: if specific criteria are met, a person will be deemed a contractor. This is intended to reduce costly disputes over employment status and give both parties clearer expectations from the outset. It’s a response to ongoing uncertainty and recent legal challenges in the gig economy.
Note: These changes are still pending. For now, it’s essential to assess each engagement carefully and seek legal advice if there’s any doubt.
Important: We can advise on the tax and accounting side but legal classification is a matter for employment law—please check with your lawyer if you’re unsure.
