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, ACC, KiwiSaver 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 12 things you should pay attention to.
1. Income Tax
Unlike a situation in which you’re employed on a salary/PAYE basis, when you’re contracting it’s your responsibility to calculate and pay the right amount of tax to IRD. Every year in April, you’ll need to file an annual Income Tax return (IR3) declaring all income and expenditure to IRD for the preceding year.
2. Withholding Tax
If you work through a Recruiter or other similar ‘labour-hire’, they may ask you to fill in an IR330C form, to specify a rate of Withholding Tax for them to deduct from your pay every time they pay you. This rate of tax is fixed for your entire period of employment with them, and it is worth noting that more often than not, it will be an incorrect estimation of your tax rate. An individual’s tax rate is very rarely a round number, and quite often, nominating an arbitrary rate on an IR330C form can leave you paying either too much, or too little tax on your earnings. Your employer or recruiter is not responsible for making sure that the tax rate you elect to provide to them is accurate, and so it is your responsibility to choose the right tax rate to provide.
3. Provisional Tax
When you submit an IR3 income tax return to Inland Revenue at the end of the Financial Year, if you owe more than $2,500 in income tax, you will be required to be subject to Provisional Tax payments in the following financial year. As part of the IR3 return, you will be asked to predict your income for the forthcoming year. Be aware - getting these predictions wrong, or deliberately fiddling your Provisional Tax predictions can result in fines and penalties. Being subject to Provisional Tax means that you will need to estimate your future income, and make 3 payments throughout the financial year, on a set schedule, to ensure that you’re paying your taxes in advance.
4. Terminal Tax
If you are making Provisional Tax payments throughout the year, and these payments do not fully cover the tax owing on your income (for instance if you earn more than the income you predicted on your IR3 return), then you will be subject to Terminal Tax, which is the balance of tax owing. You must pay any Terminal Tax payments on or before the IRD due date.
5. ACC Levies
Whenever you file an IR3 tax return, IRD will inform ACC of your previous year’s earnings, and ACC will calculate how much you owe for your ACC cover, and will send you a bill. Be aware that ACC bills may come out of the blue, without any warning, and they’ll likely be for a sizeable amount. In order to not get caught out over - or underpaying, you’ll need to ensure ACC has all the right information, and that they have you on the correct levy rate for the type of work you do. The default ACC work type is Manufacturing - which carries a very high levy rate, so it definitely pays to make sure that ACC has all the right information for you. Once you’ve got all of the right information to ACC, you’ll need to calculate and pay the three types of ACC levies (N.B. most accountants will not do this for you):
- Earners’ Levy
- Work Levy
- Working Safer Levy
6. GST (Goods & Services Tax)
If you earn over $60,000/year as a contractor, you‘ll need to register for GST. Once registered, you’ll have to file regular GST returns on a 1, 2 or 6-monthly basis and make GST payments to IRD for any GST that is owing. Registering for GST means that you’ll need to charge your clients 15% extra for your services, and will be required to pass this additional income directly on to IRD. If you incur eligible business expenses, you are able to claim back the GST portion of those expenses and offset that against the GST you owe IRD 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.
7. 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 repayments, as IRD will expect this to be paid 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.
8. Professional Insurance
Your contract may require you to have Professional 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 Insurance usually covers two aspects - Public Liability Insurance and Professional Indemnity Insurance. Public Liability insurance will cover you for any detrimental impact your work has on members of the public - such as causing accidents or harm, whilst Professional Indemnity Insurance covers you for any negative impact your work might have on a client organisation you work for.
9. Business Expenses
If you incur business expenses as part of your contracting work, you may be eligible for tax relief on those expenses. For example, if you purchase equipment in order to be able to perform your work, you will be able to lodge these as business expenses 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 expense, and offset that against any GST collected from your clients.
10. 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 there 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, 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! Some recruiters or other 3rd parties will raise what is known as a ‘buyer-created invoice’ - where they will create the invoice on your behalf, pay you directly and provide you with a ‘remittance’ specifying the earnings they have paid you. Buyer Created Invoices (BCI) are usually based on a Timesheet that you have provided. It is worth noting that you will need to hold on to all Remittance advices you are sent by your clients for 7 years, to maintain accurate records.
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 both IRD and ACC, we’ll represent you to these government agencies and ensure that you’re compliant and up-to-date on all of your obligations.
Click below to learn more about what Hnry does for contractors.