In spite of all the awesome opportunities of contract work, it does come with many financial obligations that would normally be taken care of by a permanent employer.
For instance, Income tax, GST, Medicare, Superannuation all get dropped on your plate when you become a contractor. And if you’ve been working in permanent employment your whole career, it can be very difficult to actually know where to begin.
For a quick overview, here are the 10 things you should pay attention to.
1. Sole Trader vs. ABN Sole Trader
The first thing to note about operating as a contractor, is that you’ll most likely want to register for as an ABN Sole Trader sooner rather than later. If you invoice an organisation, and you don’t have an ABN, that organisation is required by law to deduct tax at the highest rate, as well as declaring your income through to the ATO. As an individual, you won’t want a big chunk of tax deducted before you get paid, so having an ABN can make sure it doesn’t happen.
Being an ABN Sole Trader can also allow you to register a .com.au domain name, and having an ABN Number is a sign of a professional individual or business, and means that you’ve actively taken steps to register yourself and be compliant. Becoming an ABN Sole Trader means that you’ll be able to put your ABN Number on any invoices or documents you send to your clients, which will keep you looking professional.
2. Income Tax
Unlike a situation in which you’re employed on a salary/PAYG basis, when you’re contracting it’s your responsibility to calculate and pay the right amount of tax to the ATO. Every year in July, you’ll need to lodge an annual Income Tax return declaring all income and expenditure to ATO for the preceding year.
3. Medicare Levies
Whenever you earn contracting income, you will be required to pay 2% of that amount in Medicare levies. This levy is in addition to any Income Tax you might pay on your taxable income. Depending on you or your spouse’s circumstances, you may be entitled to a reduction or exemption from Medicare levies, and so it can pay to get professional support.
Your Medicare levies pay for cover across 3 key areas: Hospital, Medical and Pharmaceutical. It’s really important for you to know what Medicare does cover - and what it does not cover. The PrivateHealth.gov.au website has some really useful information to help you understand what your Medicare levies will cover.
In addition to the base Medicare levy, you may also be subject to the Medicare Levy Surcharge (MLS) if you are earning over a certain amount and you have no private patient hospital cover.
4. GST (Goods & Services Tax)
If you earn over $75,000/year as a contractor, you‘ll need to register for GST. Once registered, you’ll have to file regular BAS returns on a 2-monthly basis and make payments to the ATO for any GST that is owing. Registering for GST means that you’ll need to charge your clients 10% extra for your services, and will be required to pass this additional income directly on to the ATO. If you incur eligible business deductions, you are able to claim back the GST portion of those expenses and offset that against the GST you owe the ATO from your income. If claiming business expenses, you’ll also need to keep receipts as records for 7 years.
N.B. GST is something that is charged in addition to your income - it does not replace Income Tax or remove the need for you to pay Income Tax on your earnings.
5. Student Loan
If you’re a contractor, you’ll need to make sure you calculate and set aside enough money every time you get paid to cover Student Loan/HELP repayments, as you’ll be expected to pay this regularly on your income. Unlike when you have a permanent/salary job where your employer makes student loan deductions, you will be solely responsible for managing all student loan deductions from your contracting income.
6. Professional Insurance
Your contract may require you to have Professional Indemnity Insurance (you may be able to have this provided by your recruiter). Otherwise, you’ll need to arrange this yourself and provide your recruiter/ client with a valid insurance certificate. Professional Indemnity Insurance covers you for any negative impact your work might have on a client organisation you work for, and some clients will insist that you have it in place before you are able to start work.
7. Business Deductions
If you incur business expenses as part of your contracting work, you may be eligible for tax relief on those expenses, in the form of deductions. For example, if you purchase equipment in order to be able to perform your work, you will be able to lodge these as deductions to reduce the amount of your income that you need to pay tax on. If you are GST registered, you may also be able to claim the value of the GST portion of the deduction, and offset that against any GST collected from your clients.
8. Home Office Expenses
If you work from home as a contractor, you may be able to claim home office expenses to get a reduction in your income tax liability. You’ll need to calculate the claimable proportion of your utility bills in comparison to the size of your home office and make sure you hold on to all receipts. You can claim all sorts of things as home office expenses, ranging everywhere from utility expenses (power and Internet) to office supplies. It can be a challenge to figure out what can and cannot be claimed as a home office expense, and the portion of that which is claimable largely depends on how you measure out your home office. There are some pretty helpful resources out their for determining how to apportion your home office area, all of which can provide some further assistance and insights.
When working as a contractor, you will be expected to log and track the hours you work for a particular client you work for. Your clients will not pay you for the hours where you are not present in their office or on site, and that includes lunch breaks, doctor’s appointments, or childcare commitments. There are multiple options for timesheets, from online apps to self-created spreadsheets. Depending on your needs and your unique lifestyle, it might make more sense to use one kind of timesheet tool versus another.
Rather than automatically receiving a Payslip from your employer every time you get paid, when you are a contractor you may need to raise an Invoice to your client in order to have them pay you. Invoices must have a set format, with specific information on them, and usually you will need to wait a period of time after issuing the invoice for your client to pay - most clients tend to wait up to 20 days before paying an invoice!
Hnry for Independent Contractors
If you’d rather not worry about the admin, even if you need help finding work, Hnry can provide you with the tools to hit the ground running as a contractor.
Hnry automatically pays and files taxes for independent contractors, so they never think about tax again!
Hnry’s team of tax experts will review your business and client chargeable expenses in real time, providing you with instant tax relief on your expenses – all for no extra cost.
As a registered tax agent with the ATO, we’ll represent you to the government and ensure that you’re compliant and up-to-date on all of your obligations.
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