Self-Employed vs Contractor vs Company: What's the Difference?

Choosing your business structure is like packing for summer. Bring a snow jacket to the beach and you'll overheat. Bring a swimsuit to the mountains and you'll freeze. Pick the right fit for your business, and everything works smoothly with minimal fuss.

If you're starting out in New Zealand or you've been operating for a while and wondering whether your current setup still makes sense, here's a simple breakdown of the three most common options.

Sole Trader (Self-Employed)

Being self-employed means you are the business. There's no separation between you and it.

You use your own IRD number. You earn the income, you pay the tax, and you're personally responsible for any debts. You're not an employee, you work for yourself, and you manage your own obligations with IRD and ACC.

This is the simplest structure to set up. There's no registration fee, minimal paperwork, and you can get started straight away.

It's the most common structure for people like cleaners, tutors, nail technicians, handypeople, and online sellers, anyone working for themselves on a relatively small scale.

Example: A cleaner who finds her own clients, sets her own hours, and invoices each one directly. Or a tutor giving lessons from home and managing their own bookings.

Contractor

Contractor isn't actually a legal structure, it describes how you work, not what you are.

You can be a contractor as a sole trader or through a company. The key feature is that you're not an employee. You invoice your clients, you pay your own tax and ACC, and you don't receive holiday pay, sick leave, or KiwiSaver contributions from the people you work for.

Contractors typically work on projects or short-term engagements, often for multiple clients at once. The work might look similar to employment from the outside, but the relationship is different, you're providing a service under a contract, not working under an employment agreement.

This is common for builders, IT contractors, consultants, graphic designers, and project-based workers.

Example: A builder who contracts to a main contractor across multiple job sites. Or an IT consultant working with a company for three months, invoicing weekly, and managing their own tax obligations.

Company

A company is a separate legal entity from you. It has its own name, its own IRD number, and its own legal responsibilities.

The company earns the income and pays tax at a flat rate of 28%. You then pay yourself from the company, either as a salary (which is taxed at your personal rate) or as drawings, depending on how it's set up.

One of the main advantages of a company is limited liability. In most cases, your personal assets are protected if the business runs into financial trouble. It also tends to look more established to larger clients, which can matter if you're working with corporates or tendering for bigger contracts.

The trade-off is more administration. You'll need to file annual returns, keep proper company records, and usually work with an accountant to manage the structure properly.

This structure is common for growing businesses, businesses with staff, and higher-income earners.

Example: A café with two staff and a growing customer base. Or a landscaping business running multiple crews across different jobs.

When does it make sense to switch?

This is the question most people really want answered — and it depends on your situation.

Staying as a sole trader usually makes sense if:

Your income is under $78,100. At that level, your personal tax rate is 30% or lower, close enough to the company tax rate of 28% that the admin cost of running a company usually outweighs the saving. It also makes sense if your work is low-risk, you don't have staff, and you want to keep things as simple as possible. If you need every dollar you earn to cover your living costs, there's no real advantage to a company structure either, because the money is coming out to you regardless.

Registering a company starts to make sense if:

Your profit is well above what you need to live on, say $100,000 to $180,000 or more. At that level, you can leave extra profit sitting in the company where it's taxed at 28%, instead of paying personal tax at 33% or 39%. A company structure also becomes more important when you're hiring staff, because it gives you a layer of protection from employment-related risks. And if you're working with larger clients or tendering for contracts, operating through a company can add credibility.

There's no single right answer: it depends on your income, your risk, and where your business is heading. But understanding the basics puts you in a much better position to make the right call.

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This is the kind of decision I help my clients think through. If you're not sure which structure fits your situation, get in touch, I'd love to help you work it out.