10 EASY STEPS TO MANAGING CONTRACTING

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1 10 EASY STEPS TO MANAGING CONTRACTING Working as a contractor is incredibly rewarding, both financially and professionally. The challenge of contracting is simple you are an independent professional judged on the quality of your work. Bad IT contractors don t last long the New Zealand IT market is very small. On the other hand, good IT contractors almost never run out of work, especially good Sead contractors. Being a contractor does introduce the overhead of managing your day to day finances. Fortunately, there are many good tools available to make this job straightforward. The 10 Steps are formulated by experienced contractors. They are designed to make your life as a Sead contractor easy. If you have any enquiries or feedback about these steps, please contact us at info@sead.co.nz Happy contracting!

2 STEP 1: SET UP A LIMITED LIABILITY COMPANY A vast majority of IT contractors work through their own limited company. Being set up as a limited liability company has a number of advantages: The company runs as its own discrete entity. It exists with its own IRD number, own income and own expenses. There is no confusion with your personal income & expenses. If structured correctly there can be some small tax advantages. You can use a company to market yourself further. HOW? Setting up a company in New Zealand is quick and easy. A company can be registered online at the Company s Office. IRD and GST numbers can be applied for via the Company s Office or IRD. HERE ARE THREE SIMPLE WAYS TO SET UP A COMPANY: 1. Get your accountant to do it for you. 2. Contact Register A Company ( This company does it all for you, including producing all documentation to run the company. 3. Set up your own company online at the Companies Office. Go to and follow the instructions. Once your company is set up, you ll receive a Certificate of Incorporation. Make copies of this document and file it away somewhere safe. LIMITED LIABILITY COMPANY VS SELF EMPLOYED BENEFITS OF LIMITED LIABILITY COMPANIES The benefits of using a limited liability company as opposed to contracting in your own personal name are as follows: A company allows limited liability protection in the event that the contracting company is deemed to be negligent in its work and damages are sought. In layman s terms this implies that only the net assets of the contracting company could be pursued to pay for damages for possible negligent work rather than the personal net assets of the individual. HOWEVER, this is fairly unlikely for Sead IT contractors. 2

3 The company structure can also be useful where in any given income year your gross income from the IT services is split between purchasers and no one purchaser represents more than 80% of the gross income. In this instance, the attribution rules imposed by the Inland Revenue Department on Personal Services Income are not broken and the company structure would allow you to possibly pay shareholder salaries to other shareholders (i.e. spouse) and also if set up with a trust shareholding to make dividend payments to the trust. Complications however, arise where Sead is the intermediary who contracts out to the providers and the only connection of the contracting company is to Sead. Where this is the case the attribution rules would specify where the contractor may have work on different contracts for Sead in the income year, that attribution rules have not be broken and the contracting company is effectively the individual who has provided the services. In this instance all the net income would have to be paid out to the individual who performed the services and taxed at the individual tax rates. DISADVANTAGES OF LIMITED LIABILITY COMPANIES The disadvantages of using a limited liability company opposed to contracting in your own personal name are as follows: Additional compliance costs associated with the filing of annual returns with the Companies Office and additional tax returns that need to be filed dependent on the complexity of your ownership structure. STEP 2: APPLY FOR AN IRD NUMBER Your company will need an IRD number to be able to complete end of year tax returns. HOW? Your accountant can do this for you or you can apply for an IRD number yourself. Just go to download and complete an IR596 form. Remember to send the IRD a photocopy of your Certificate of Incorporation. When you receive your IRD number, file it away somewhere safe. It may also pay to yourself a copy so you have it handy at work. 3

4 STEP 3: APPLY FOR A GST NUMBER You will need to register your company for GST if you are conducting a taxable activity and your annual turnover is expected to exceed $60,000 (that s most of us). You are not obliged to register for GST if your taxable activity has an annual turnover of less than $60,000. Of course the IRD would prefer you didn t, as you can claim back GST on company expenses including office supplies and equipment purchases, internet, electricity and phone bills and other expenses you require to run your home office. HOW? TO REGISTER FOR GST 1. Visit to register online or download an IR360 form (there is also an IR365 guide to help you). 2. Complete the form and fax or mail it back to the IRD. When you register for GST you can select to pay monthly, two-monthly or six-monthly. Sead recommends you register for a six-monthly taxable period so you only have to do your GST returns twice per year. When you receive your GST number from the IRD, file it somewhere safe and yourself a copy so you have it handy at work. STEP 4: SET UP COMPANY BANK ACCOUNTS The advantage of running everything through your company bank accounts is that every transaction is recorded. This simplifies the entire process when it comes time to do your GST and tax. Take a copy of your Certificate of Incorporation (from step one) into your chosen bank and open the following two accounts: 4

5 1. A current account. This account will be used for your day-to-day expenses and income. You should select an account type that offers the lowest transaction cost. You may wish to also include a cheque facility and an overdraft facility. Deposit some initial working capital into this account ($500 is sufficient). 2. A tax account. This should be a high-earning savings type account. This account will only be used for holding regular instalments for tax until your tax is due, at which time you will pay the IRD. With the tax account please remember that this has to cover GST payments and also hold enough for provisional tax payments. See for more information. Please also refer to comments on taxation and Tax calculators in Step 8. We advise that you talk to your accountant to ensure that appropriate levels of income are being put away for GST and provisional tax payments. Note You may choose to use a different bank for this account depending on the rates available at the time. Ensure both accounts are set up for both phone banking and internet banking. Also ensure that your chosen bank offers the facility to download your internet banking files. This is critical to later steps. STEP 5: PURCHASE OFFICE SUPPLIES This step is optional but will help keep things in order. Some useful items include: 1. Filing cabinet The IRD requires you to keep all receipts and invoices for seven years. Stuffing these away in a shoe box under your bed might be easy at the time, but will cause you grief and suffering when it comes to tax time. A well-organised filing cabinet is a godsend. 2. Desk with chair 3. PC with internet connection you can do most of your tax, banking, accounts etc online these days, therefore a PC with an internet connection is essential. 4. Fax machine optional but occasionally useful. 5

6 5. Of course all these items are 100% tax deductible. STEP 6: PURCHASE & INSTALL CASHBOOK/ACCOUNTING SOFTWARE A decent cashbook/accounting software package is incredibly useful and powerful. It will save you paying your accountant to do your GST for you You can either keep track of your finances on a spreadsheet or purchase a cashbook package like Xero, Cashbook Complete, MYOB cashbook, etc. Perhaps ask your accountant for advice. It's also tax deductible. Check that: It is written in New Zealand for New Zealand businesses in consultation with the IRD. It offers simple yet powerful features, keeping the time you spend on your books to a minimum It is of good value compared to other products. STEP 7: INVOICING At the end of each month: 1. Create a report to obtain your total hours for the month. 2. Get a copy of the Sead standard invoice template from the Sead team. Fill out: the company details section your rate and hours for the month your expenses for the month. 3. Send the invoice to Sead including scanned versions of any receipts for expenses you have. STEP 8: PAYDAY After all, you don't work for free. 6

7 Now is a good time to access your bank accounts and allocate some of your funds. If you don t make provision for tax as you go, you will be required to find funds quickly at tax time. This is not an ideal scenario. It is easy and simple to make provision for tax as you go, plus if you follow the steps below you can make some interest on the tax while it accumulates. HOW? When you receive payment for your invoice, execute the following steps: 1. If you have not already, request a copy of the Sead Monthly Tax Provision template. 2. Fill out the form. 3. The form shows you how much your total tax provision (GST and income) for the month should be. Transfer this amount of money to your tax account. 4. The remaining money in your current account can be transferred to your private account for drawings. Always leave some money in the current account to cater for expenses in the forthcoming month. 5. Download the internet banking electronic file for your current account and save it somewhere appropriate. 6. Most cashbook packages allow you to import the internet banking file. Most cashbooks are smart enough to ignore duplicate transaction when importing bank file if they exist already in your cashbook. 7. Next step will be to go through each transaction and categorise it by selecting what the item represents. For example, SOVEREIGN TOTAL CARE POL might be categorised as insurance, COMPANY XYZ NZ LTD might be categorised as income. You should be able to easily set up new categories in your cashbook and whether a category should have GST applied or not. 8. Backup your cashbook file. You can either save this to a removal media, or set up an account on a webmail system such as gmail ( STEP 9: GST All contractors must charge clients GST on services, which is then payable to the IRD. Feeling like a free tax agent yet? Don t worry you can work it to your advantage. 7

8 HOW? The IRD will send you a letter when it is time to do your GST. If you registered your company using an accountant, it is likely that this letter will go to them as your tax agent. The letter contains registration details you will need to file your return online (your GST number and your DLN number). You can ask your accountant for this letter or call the IRD. If you have registered for GST six-monthly, then you only have to do the following twice per year. Otherwise, you will need to do it more regularly. Doing your GST involves three key (really easy) tasks: 1. Figure out how much GST you have to pay (or receive back). The easiest way to do this is using your cashbook/accounting package software. 2. Do your GST return this is done online. 3. Pay the IRD this is also done online via internet banking. ONE FIGURE OUT YOUR GST 1. Ensure your cashbook is up to-date with all transactions for the period the GST covers. If you have made any purchases outside of your current account (for example cash purchases or purchases using private accounts) then enter these into your cashbook by simply typing in the line item (ensure you have receipts for these). A list of expenses that could be used to offset income is as follows: Motor vehicle expenses (limited to business use) Research Materials Subscriptions Office Materials/Stationery Entertainment (Limited to 50% if it involves food and alcohol) Computer Consumables Travel and Accommodation ACC payments Insurance on work related items (Car, Computer) 2. Select reports->gst 3. Select the period for the GST, as per the letter from the IRD. 4. Your cashbook should produce a GST report for you formatted in the exact IRD format. Print a copy of this report. 8

9 TWO DO YOUR GST RETURN 1. Go to 2. Follow the prompts on the site to complete your GST return. THREE PAY THE IRD 1. Go to your internet banking site and login 2. Select the bill payments section and look for tax payments. Most internet banking sites offer this functionality. If you are unsure call your bank s customer service centre and ask for help. 3. Make a payment to the IRD from your tax bank account for the amount shown in your Cashbook Complete GST Report. STEP 10: TAX This final step is the specialist domain of your accountant. Sead strongly recommends that you do not attempt taxation (except for GST) yourself. Ask your accountant what form he would like the information in. It is likely that a print out of your cashbook package will be all the information he/she requires. 9