Questions about tax as a contractor

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Forums › Finance and wealth management › Questions about tax as a contractor

Smix

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#239501 20-Jul-2018 21:52

Hey Team,

I'm a business analyst in Wellington looking to make the leap into contracting, and have a few questions relating to tax. I understand that I'll need to engage an Accountant at some stage, but would like to get my head around a few of the more 'simple' things. At this point I'm thinking that registering as a Sole Trader is the route I'll be taking.

From what I can see on the IRD website, anyone earning over $60,000 must register for GST. Does this effectively mean that I should be setting aside an additional 15% from my rates?

I'd like to also get confirmation that my understanding of tax is correct (sans the GST question above):

20% will get automatically deducted from the Agency (IR330C)
I need to put away 10% to cover the remaining income tax
2% goes to ACC

Additionally, $X will go towards insurance if my Agent doesn't already offer it.

Also happy to take names for any Accountants in the Wellington area!

THanks!

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#2059699 20-Jul-2018 22:39

You would not normally set aside the GST from your rates. You add it to your rates.

If your rate is, say, $100/hour then you will bill the client $115 and account for the GST to the IRD less any allowable GST on expenditure incurred in the course of the business.

The income tax/withholding tax question is complex. My wife is wrestling with that one at the moment because there comes a time when the IRD is both trying to ping you for Provisional Tax and, at the same time, make you pay withholding tax. At the end of the year, the total would be added up and any surplus you have paid would be refunded. However, it can really mess up your cashflow and the IRD do not seem to have fully understood the subtle nuances of that particular scenario.

You absolutely should consult an accountant BEFORE you set anything up, because it will be much easier to set it up right with their advice now than to set it up wrong, get advice later and then want to change things around.

timmmay

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#2059751 21-Jul-2018 07:42

You charge PLUS GST. Agency adds their cut ON TOP of your rate, it doesn't come out of your rate. For ACC call their business line and tell them you want to set up cover plus or cover plus extra (I forget which - Google it). It's agreed coverage, it'll probably cost more than 1%.

You need to put away into a separate bank account 15% to pay your GST bill then another 33% to pay your tax bill. If you don't do this you'll be in a world of pain at tax time.

If all your income is from one client just get the basic Xero package and let it generate your tax returns. If you need help (say you have some salary income and some self employed income in a year) get an accountant, which will cost around $1000 per year for basic stuff like doing tax returns.

You'll come out ahead of salary, hopefully well ahead.

Smix

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#2059760 21-Jul-2018 08:24

Thanks for the responses! Great to get clarification on GST.

I’ve seen cover plus in other GZ threads so that’s definitely on the cards.

From my understanding I’ll be working under a labour hire agreement so I think something like Xero basic will be enough however will chat with the accountant first.

jamesrt

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#2059761 21-Jul-2018 08:26

+1 for using Xero; it does a lot of the thinking for you.

When I was contracting, I used Simple Accounting Services; they had a login into my Xero account to do the annual tax stuff. Very simple, as the name implied.

Geektastic

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#2059774 21-Jul-2018 09:29

We don't do our accounting.

The accountants have direct access to the bank account details using Bank Link and just query anything they can not obviously identify.

tchart

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#2059805 21-Jul-2018 10:19

Hey, I made the same leap about 10 months ago. I contract through an agency who pay me less the 20% tax for IRD.

Couple of pointers;

1) I am GST registered. As people have stated the agency charges the client your rate plus GST.
2) Sometimes I wish I wasn't GST registered as you have to do a GST return every few months which is a pain if you have lots of expenses etc.
3) I'd say unless you are contracting outside of your contract I'd probably avoid registering for GST if you can - I was told it was optional.
4) You don't need an accountant but it makes it easier. I do my own returns but I did accounting at school.
5) I put aside an extra 10% for the IRD.
6) if you end up paying more than $10k (I think that's the amount) on your return then you need to do provisional tax for the following year.

Pm me if you have any other questions.

tchart

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#2059806 21-Jul-2018 10:25

Oh just to add to the other comments IRD changed things recently (2 years?) and you have to elect an amount of tax for the agency to deduct. Usually 20%. You can elect any amount and under certain circumstances you can opt out but I think this is rare.

Personally I find it more efficient to deduct at the agency and then don't worry about it. Doing so reduces the end of year tax bill and on going provisional tax. Unless you are really good with money is strongly suggest getting tax deducted by the agency. If you do more then you are likely to get a refund at the end of the tax year and possibly avoid provisional tax.

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Geektastic

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#2059811 21-Jul-2018 10:30

tchart: Oh just to add to the other comments IRD changed things recently (2 years?) and you have to elect an amount of tax for the agency to deduct. Usually 20%. You can elect any amount and under certain circumstances you can opt out but I think this is rare.

Personally I find it more efficient to deduct at the agency and then don't worry about it. Doing so reduces the end of year tax bill and on going provisional tax. Unless you are really good with money is strongly suggest getting tax deducted by the agency. If you do more then you are likely to get a refund at the end of the tax year and possibly avoid provisional tax.

So far we haven't convinced the IRD that it should reduce prov tax...

Smix

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#2059870 21-Jul-2018 11:30

Thanks again for the responses.

@tchart With regards to paying my tax up front, isn't there merit in holding onto it for as long as possible before paying so that it can earn interest in a savings account? Also from my reading of IRD's website, isn't it mandatory to register for GST if you earn +$60,000?

@jamesrt cheers for the plug. I'll give them a call on Monday.

timmmay

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#2059877 21-Jul-2018 11:39

If your agency can pay you as an employee, great. If not then I don't really see an advantage of them deducting any tax - put it in your bank and earn the interest / offset your mortgage interest.

tchart

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#2059889 21-Jul-2018 12:14

timmmay:
If your agency can pay you as an employee, great. If not then I don't really see an advantage of them deducting any tax - put it in your bank and earn the interest / offset your mortgage interest.

Agency payments are considered schedular payments so you aren't an employee. Schedular payment are subject to tax at source unless you get an excemption.

RE GST and 60k as a sole trader I don't believe it is mandatory. In fact I only registered for GST after I had started contracting. My first agency payment didn't include GST, subsequent ones did.

@timmmay yes interest is a possibility but for example I got $4 interest last month. If I had collected all the tax money maybe I'd get $12 a month? Given that's a small percentage of my hourly rate it's better value for me to get the agency to pay the IRD and not bother farting around with interest.

Like I said if you are really really good with your money and don't want any tax surprises agency payments to IRD are the way to go!

Delphinus

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#2059893 21-Jul-2018 12:23

tchart:
2) Sometimes I wish I wasn't GST registered as you have to do a GST return every few months which is a pain if you have lots of expenses etc.
3) I'd say unless you are contracting outside of your contract I'd probably avoid registering for GST if you can - I was told it was optional.

I'd completely disagree with this. Being GST registered is brilliant, being able to get a 15% instant discount on all goods like buying yourself a new PC/Laptop, phone, your internet connection, phone plan etc etc. Since Xero does all the calculations for you, it's a 2 min process to quickly skim the GST report in Xero, hit the Send to IRD button, then pay what is owing. 2mins work for 15% discount works for me

tchart

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#2059901 21-Jul-2018 12:39

Delphinus:
tchart:
2) Sometimes I wish I wasn't GST registered as you have to do a GST return every few months which is a pain if you have lots of expenses etc.
3) I'd say unless you are contracting outside of your contract I'd probably avoid registering for GST if you can - I was told it was optional.

I'd completely disagree with this. Being GST registered is brilliant, being able to get a 15% instant discount on all goods like buying yourself a new PC/Laptop, phone, your internet connection, phone plan etc etc. Since Xero does all the calculations for you, it's a 2 min process to quickly skim the GST report in Xero, hit the Send to IRD button, then pay what is owing. 2mins work for 15% discount works for me

Correct, however you realise that if you aren't GST registered then the amount including GST is the amount for the expense. So you aren't really saving anything.

If you are GST registered you might get a 15% discount but then your expenses claimed at tax time need to be exclusive of GST.

If it was a way to get discounts then everyone would do it including Joe public.

If it's not a business expense then you shouldn't be claiming GST back on it. And if you are double dipping then it's tax fraud.

Delphinus

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#2059905 21-Jul-2018 12:48

tchart:
Delphinus:

tchart:
2) Sometimes I wish I wasn't GST registered as you have to do a GST return every few months which is a pain if you have lots of expenses etc.
3) I'd say unless you are contracting outside of your contract I'd probably avoid registering for GST if you can - I was told it was optional.

I'd completely disagree with this. Being GST registered is brilliant, being able to get a 15% instant discount on all goods like buying yourself a new PC/Laptop, phone, your internet connection, phone plan etc etc. Since Xero does all the calculations for you, it's a 2 min process to quickly skim the GST report in Xero, hit the Send to IRD button, then pay what is owing. 2mins work for 15% discount works for me

Correct, however you realise that if you aren't GST registered then the amount including GST is the amount for the expense. So you aren't really saving anything.

If you are GST registered you might get a 15% discount but then your expenses claimed at tax time need to be exclusive of GST.

If it was a way to get discounts then everyone would do it including Joe public.

If it's not a business expense then you shouldn't be claiming GST back on it. And if you are double dipping then it's tax fraud.

I was referring to business expenses (computers, phone, internet etc) which are all reasonable business claims.

Using a 17.5% threshold (earning up to $48k): If you are NOT gst registered, a $115 item you claim $20.13 (the $115 offset the earning you would have paid tax on).
If you ARE gst registered you claim the $15 in GST back, then 17.5% of the remaining $100 = $32.50 refund/tax offset. And you get the $15 back within 2 months, not at the end of the year.

This obviously increases with higher tax rates, and higher cost items.

And no not everyone incl Joe public would be doing it, you need to be in business/contracting, like the OP.

timmmay

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#2059909 21-Jul-2018 12:57

tchart:
timmmay:

If your agency can pay you as an employee, great. If not then I don't really see an advantage of them deducting any tax - put it in your bank and earn the interest / offset your mortgage interest.

Agency payments are considered schedular payments so you aren't an employee. Schedular payment are subject to tax at source unless you get an excemption.

RE GST and 60k as a sole trader I don't believe it is mandatory. In fact I only registered for GST after I had started contracting. My first agency payment didn't include GST, subsequent ones did.

@timmmay yes interest is a possibility but for example I got $4 interest last month. If I had collected all the tax money maybe I'd get $12 a month? Given that's a small percentage of my hourly rate it's better value for me to get the agency to pay the IRD and not bother farting around with interest.

Like I said if you are really really good with your money and don't want any tax surprises agency payments to IRD are the way to go!

Interesting. I contractor for 10+ years, through agencies and direct. I invoiced and got paid, tax and insurance was my problem. I guess things have changed, or there are different setups available.

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