Deciding to go it alone as a business Contractor or Freelancer can be very liberating. You get to be your own boss, you can decide your own salary and you get to work in the industry you love! If you choose to become a Contractor just remember that there are a few simple financial obligations you must follow…

What is a Contractor?

In order to qualify as a Contractor it means that you have a written contract from another business to be paid for services carried out in a particular industry. This could be any industry from Plumbing, to Floristry to Project Managers.

Because you are a Contractor it means that you are technically self employed so therefore you do not receive an annual salary as such, but instead a fortnightly or monthly payment from the business you carry out employment services for. You must provide an invoice to the particular business in order to be paid.

As a Self Employed Contractor you are not entitled to sick pay or holiday pay from the business you are working for, nor from the Government or the IRD.

Earning a Buck

All monthly or fortnightly payments made to you as a Contractor is known as your Gross Income. This is the total amount before tax.

As a Contractor you can normally claim back for any work related expenses, which are known as Allowable Deductions. This could be anything from petrol to parking expenses to the odd client lunch.

You should receive an annual summary of earnings from the IRD which shows your Gross earnings before Tax. You are required by law to pay a certain amount back to the IRD for Tax deductions.

Paying Your Tax

Generally the Tax which you have to pay as a Contractor is calculated by the IRD as 20% of your total gross before tax earnings.

You can choose for your tax rate to be slightly higher if you do not have a lot of Allowable Deductions to file for when you pay your annual tax bill, (having a lot of Allowable Deduction claims to pay tax on will mean you end up paying more tax in total bill).

Make sure you keep all your invoices and receipts for any Allow Deduction expenses, because you have the right to file for a Tax Return like every other working resident in New Zealand at the end of the financial year.

Registering For GST

GST is New Zealand’s Goods and Services Tax and it is charged at 12.5% (soon to be raised to 15%). Because you are a Contractor, you may need to pay back GST to the Government.

If your Gross Income before Tax is more than $60,000 in a 12 month period, then you must pay GST. You can register with the IRD for GST. They will provide you with a GST number, which you must show on any invoice you charge for your employment services.

ACC Levies

A bit like insurance for health and safety, as a self employed Contactor, you still have the right to claim Accident Compensation. However you will need to take full responsibility for paying ACC levies to the ACC in order to make any claims for any accident which happens in the work place. The Government or IRD will not provide ACC coverage for you.

Student Loan Repayments

If you happen to have a New Zealand Student Loan, you will need to make voluntary re-payments from your salary. Student Loan payments are not automatically deducted by the business you are providing services for, nor the Government or the IRD.

Further Information

For more information on financial obligations as a Contractor please visit the New Zealand Inland Revenue Department website.

You may also be interested in reading more from our website on How To Write a CV and Why Online Exposure is important for small to medium businesses.

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Comments

  1. Gresham Street says:

    Be careful with this article, it is full of inaccuracies:
    1. Client lunches are are not fully deductible, the IRD only allows a portion of these to be claimed.
    2. The rate of tax that you will have to pay is not 20%, this is the amount that is with held by the entity you are contracted with on payment, you are still liable for any tax owing at the end of the year which is calculated on your total annual earnings, this may be more or less than 20% depending on how much you earn.
    3. “having a lot of Allowable Deduction claims to pay tax on will mean you end up paying more tax in total bill”, this doesn’t make sense, if you have more allowable deductions then you will end up paying less tax overall.

    I suggest a visit to your local Chartered Accountant to discuss your options and obligations or email me on greshamstreetlimited@gmail.com

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