A publication of. Contractor Compliance

Transcription

1 A publication of Contractor Compliance

2 Written by Peta Walker Hi! I m Peta a Chartered Accountant and business coach at BW Chartered Accountants. I m a born and bred Wellingtonian and I live on a lifestyle property in the rugged Makara Valley. Grab a coffee and let s talk about your compliance requirements as a contractor! It s easy when you know how! FOLLOW US ON

3 CONTENTS 4 Issues and Challenges 9 Taxes you have to pay 14 Helpful software and apps 16 Help is on the way! - Contractor Cohort 19 Got questions? 22 Join our contractor compliance crusade

4 Issues and Challenges While it can seem fabulous to be independent, in charge of your own professional destiny, it also adds layers of responsibility and the compliance that needs to be taken care of can be daunting 4

5 Lack of paid leave When you re an employee, you also get paid for statutory holidays, annual leave and sick leave. The employer pays you for over 6 weeks a year that you don t even walk in the door nice, eh. As a contractor you only get paid for the hours that you work. So it s critical to make sure your rate covers this. (We can help you calculate this). Scheduling your own time off is also important and being savvy about when you do this keeping in mind that you may not have continuous work so the quiet times of the year are probably better for holidays and adventures! 5

6 Having to pay your own taxes When we are employees we never have to think about paying our tax. It s taken out of our pay before we even see it. Becoming selfemployed is a whole other matter and we now have to take care of tax payments, ourselves. At first it can seem as if you re earning more money than you ever have before, until you really understand that you have to pay a significant portion of it to the Inland Revenue Department. Making that payment to the IRD can hurt and many people don t prepare for this, so when it comes time to pay their tax bill, finding the money is a struggle. 6

7 Here s a curly question how do you minimise your tax bill? Aside from doing less work and therefore earning less. Or spending up large to save a third on tax (why spend a dollar, to save 33 cents?) Tax is an expense like any other! We ll take a look at how you operate your self-employed contractor business and ensure you aren t missing out. It s our job to make sure you only pay the minimum amount of tax you have to. 6

8 There is a misconception that you get your first year tax free. You don t. You just don t have to pay it to the IRD, yet! Once you ve passed 31 March you file your return, work out what s owing, then pay that a year later AND start paying Provisional tax for the current year. You get to pay two years worth of tax in one year! Not fun! There is a possibility to get a discount on your first years tax if you make voluntary payments early. We strongly recommend every contractor puts funds aside to pay their tax, and make the payments out of that, based on their earnings now. Not last years. To make matters worse, the IRD can charge huge penalties and interest. Believe us, owing money to the IRD is expensive and many people have got themselves into a real financial mess! 6

9 Expenses that can be claimed The basic rule is that if an expense is incurred in gaining the income, then you can deduct that expense off the income when working out how much profit you made from your contracting business 7

10 Independent contractors can claim more expenses than their employed counterparts but this is limited to things that you have to pay to earn the income. When you re an IT consultant what you re mainly selling is your time and skill. The main expenses you can claim are: Any professional organisation subscriptions Training and development Use of equipment, if you provide your own Phone expenses Income protection insurance If you work for multiple clients at a time you may also be able to claim: Transport costs Use of home office expenses SHARE THIS E-BOOK! 8

11 Taxes You Have to Pay 9

12 Income Tax Because your income isn t taxed at source you must file an income tax return every year. To calculate the tax you need to pay, you have to add up all your income from 1 April until 31 March the following year. That s all your income, it includes any interest on savings, any other earnings that may have had tax deducted, then you deduct off any expenses you can claim and work out the tax that s payable on that total. 10

13 If you ve already paid some, you only have to pay what s left over, or if you ve overpaid, you ll get a refund. This is called residual tax. Fun! Once you re in the system and owe more than $2500 in tax, (total tax owing, not the residual) the IRD will expect you to pay provisional tax. This is a bit like PAYE except you pay it 3 times each year. And it s calculated on what you earned last year. 11

14 GST Once you earn (or expect to earn) more than $60,000 per annum you become a GST tax collector for the government. This means you have to pay 3/23rds of the money you bring in, to the tax department. You can add this onto your invoices going out, collecting this from your customers. You can claim 3/23rds of the expenses you pay that include GST, as long as you keep copies of receipts. Paying your GST to the IRD every 2 months is a smart idea, unless you re super self-disciplined with your money - then it s OK to choose the six-monthly option 12

15 ACC This isn t technically a tax but many people consider it one. When you re self-employed you get to pay both the employee and the employer levy. ACC will invoice someone once they have filed an income tax return that shows that they have self-employed earnings. The rate varies depending on the type of work you do. Like income tax, you don t have to pay it for the first year, but essentially, end up with a double whammy the following year. ACC have a couple of schemes. You can pay based on your previous years earnings, or you can take out ACC CoverPlus Extra, where you agree on a level of earnings to be covered by ACC. Click this link if you d like to read more about ACC for self-employed contractors. Or, if it feels like this process is sucking your self-employed will, we can do it all for you with our ACC Administration service (that s in another E-Book!) 13

16 Helpful Software and Apps 14

17 Have you heard of Xero? We love it, it makes life very easy for you and very clear for us to help you. It s beautiful Accounting Software, designed for the non-accountant. Xero offer a small package that suits most contractors. It handles up to 5 invoices going out each month and up 20 lines on your bank statement. It costs $29 per month. You can even access it from your smartphone! Nifty! As it is cloud software, we can easily review your records to make sure they re accurate and that your GST returns are reliable. The flow on from having awesome accounts that make sense, is when we come to do your income statement and tax return for you, it s reasonably straight forward so no messing around requiring lots of your precious billable time, explaining your expenses to us! You can also upload copies of all your expenses and store them in the software. Even by taking photos of them on your phone! Say cheese, receipts! 15

18 Help is on its way! 16

19 Contractor Cohort is our package especially designed for contractors! Xero accounting software subscription Monthly checks and help with your books GST return filled and filed advice every month on how much money you should have tucked aside for your tax Annual income statement and tax return preparation $149 + GST per month 17

20 What this means for you For the price of an hour or two of your time each month, we make sure your accounts are correctly completed and up to date No surprises at the end of the year in your tax bill You get a handy extension on your tax due date, by having us as your tax agent 18

21 Got questions? 19

22 Should I have a separate bank account for your business? Yes, you should. And all business income and expenses should go through it. Two things the IRD really care about are that you declare all your income and that you don t claim personal expenses. So if you have a completely separate bank account for your contractor business, it s very easy to prove to the IRD that you keep your business life and your personal life separate. It also makes it more straight-forward to calculate how much tax you ve got owing and it s really easy to set up you could even just add another suffix on your base account number for your earnings to be paid into and another interest earning saver account where your tax dollars can live quite happily until the IRD pay day! Brilliant! 20

23 Should I incorporate as a company? Tempting, isn t it? Companies pay income tax at a cheaper rate than an individual. The dreadful bore, though, is if more than 80% of your income comes from one client then all income has to be attributed for tax to you. Even if it s from multiple clients but you use most of the funds earned for personal use, the income has to be allocated to you as income and taxed at your personal rate anyway. Companies are separate legal entities, would be GST registered in their name and require full accounts that comply with the financial reporting act every year. (So actually, in the long run, it d probably cost you more in compliance!) On the other hand, you can have more than one shareholder and/or director and if the work load is shared the income can be shared. But really, you should chat with us before you decide to incorporate! 21

24 Join us? 22

25 Get on our Contractor Cohort band wagon and banish tearful tax nightmares forever! Here s what you need to do: ring us clientservices@ tweet or message us on facebook.com/bwcaltd Thanks, Lego, for helping illustrate our story 23