Freelancers and contractors often find it difficult to know exactly how much tax they need to pay – as a lot of tax calculators available out there are made for PAYE employees and not for those who are self-employed. We’ll admit, it can be confusing coming out of a PAYE job, and into contracting – especially when trying to navigate tax compliance. So, it’s always a good idea to enlist someone who can push you in the right direction and give you the
advice you need (cough, cough). Without getting into the nitty gritty, we’ve jotted down the most common tax you will likely need to pay as a contractor:
Income Tax
Any income you earn will need to have income tax paid on it. There’s no tax-free threshold in New Zealand, so any income you earn from contracting or freelancing will be taxed. Your income tax rate will be calculated by adding all your sources of income including salary or PAYE income, self-employed income (less any related self-employed expenses), and
investment income and then applying your marginal tax rate. Unlike on a PAYE salary, you will need to file IR3 returns if you have any self-employed income (including any rental income, untaxed shareholder salaries, or income that is unlikely to show at IRD) – this can sometimes be overwhelming, and you may miss some hidden tax deductions, so it’s always best to enlist an accountant for some help with this.
GST
Those who turnover more than $60,000 per financial year only from their self-employed income will be required to register for GST. Once GST-registered, you will need to charge your customers 15% GST. This will be payable to IRD when filing your GST returns on either a 6 monthly, or 2 monthly basis. It also works the other way round, where if you make a business purchase (and the supplier is GST registered), you will get a GST reduction.
ACC
Any income from self-employment will be subject to ACC levies, which will depend on the type of work you do. If you earn income from PAYE, you’ll make ACC contributions as part of your PAYE tax and any ACC levies on your income from self-employment will be on top of that.
Remember, you will need to contact IRD, and ACC if you decide to become self-employed so they can amend the details they have on hand for you.
As a contractor, you need to consistently work out the amount you need to set aside for tax, so you don’t put away too much or too little. Find out how the Outside Accounting team could save you time, money, and hassle – give us a buzz and we’ll take care of all your contractor or freelancer tax admin!
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