Contracting has been a hot topic this year with changes to the tax requirements for some contractors. We are commonly asked about expenses, GST and income tax for contractors, the summary below will give you an overview. We would be pleased to discuss your specific requirements in more detail with you.
Business Expenses for Contractors
The rules around business expenses that contractors can claim against their income are the same as all other business clients. Here is a list of common expenses contractors would have but you may have more in your specific circumstances.
- Accident Compensation Levies – ACC will invoice you directly after your first tax return is filed with self-employed income. The standard option is ACC CoverPlus but you may find ACC CoverPlus Extra is a better option for you. Here is a link to the ACC website for more information https://www.acc.co.nz/for-business/choosing-the-best-cover-option/types-of-cover-for-self-employed/
- Accountancy Fees – The cost for an Accountant to prepare your income tax return and provide advice regarding your tax payments each year.
- Bank Charges – Monthly account and transaction fees for your dedicated business bank account
- Computer Expenses – Monthly costs for software, support and consumables
- Communication Costs – Mobile phone running costs and up to 50% of home phone and internet if used for business.
- Conference Expenses – If you attend industry/business specific conferences.
- Entertainment – If you are entertaining customers there may be a 50% deduction. If you are travelling on business then the expense is fully deductible. Here is a link to the IRD guide for all the detail http://www.ird.govt.nz/forms-guides/number/forms-200-299/ir268-guide-entertainment-expenses.html
- Insurance – Many contractors pay professional indemnity insurance themselves, This is fully deductible. If you contract through a recruitment firm they may pay this on your behalf.
- Legal Expenses – If you have a lawyer review your contract or other matters relating to your business.
- Home Office – If you use part of your home for business purposes, you can claim a part of your home expenses in your business such as power, insurance, rates, repairs & maintenance and interest on home mortgage or rent. See the article in our last newsletter for more details.
- Subscriptions – For membership of industry associations or subscriptions to business publications.
- Training or continuing professional development – Keeping up to date in your area of expertise by webinars or courses.
- Travel expenses – Travel costs as part of your business (excluding home to place of work) are deductible but you should keep diary notes of date and reasons for the travel. The electronic appointment in your calendar is a good place to do this.
- Purchase of fixed assets for your business such as computers and office equipment can be claimed in two ways
- If the asset is under $500 or will last less than 12 months then the cost is fully deductible
- If the asset is over $500 and will last longer than 12 months then the depreciation on this asset can be claimed over several years. We will calculate this for you when we prepare your tax return.
What about GST?
Do I need to be registered? – If your gross (total before tax) income, including per diems and allowances, was more than $60,000 over the last 12 months or is likely to be more than $60,000 over the next 12 months, you must register for GST.
If so – There are several options about the frequency and type of return that is most appropriate for you. Contractors will usually choose a cash basis with either 2 monthly or 6 monthly return periods. Talk to us about the best option for you.
How do I do it? – We recommend the use of a dedicated business bank account linked to the online accounting system Xero. Either you can code your bank transactions as you go and prepare your own GST returns on Xero which links directly through to Inland Revenue to file your return, or we can deal with this for you. Have a look at the Xero page on our website for more information https://www.laurenson.co.nz/xero/
Do I need to have tax deducted from my contract fees?
Some contractors are required to have tax deducted, others can choose to do so.
- If you work under a labour hire arrangement and you’re not an employee working for salary or wages, it means you’re a contractor being paid schedular payments. Tax must be deducted from these payments, including payments made to companies. The term “labour hire arrangement” differs from the more commonly known term “labour-only”. Please talk to us if you are unsure if you fall into this category. Here is a link to the Inland Revenue website with more information https://www.ird.govt.nz/contractors/labour/labour-hire-business-arrangements.html / OR
- If your business activity is on the list of compulsory activities to have scheduler payments deducted. This does not apply to Companies only, but also individuals trading as sole traders. Common examples we see are those in the building industry see link to IR330C, the list is on page 3 http://www.ird.govt.nz/forms-guides/number/forms-300-399/ir330c-tax-rate-notification-contractors.html
If you contract directly to your customer (not through a labour hire firm) You can request to have tax deducted from the payments made to you if you’re a contractor (including a company) and the payments you’re receiving aren’t already salary or wages, or schedular payments.
To do this, the person paying you must agree to treat your payments as voluntary schedular payments and you must both agree to this in writing. Discuss this with your customer and complete an IR330C to select your rate of tax to be withheld. This can be a very good way of ensuring you pay your tax on a regular basis and avoids the need to put funds aside for provisional tax payments.
When your tax return is completed at the end of the financial year you may have some tax still to pay or you will receive a refund depending on the level of tax you had withheld from your contractor payments. So selecting the most applicable rate of tax to be withheld is important.
How to calculate what rate of tax to have withheld?
Inland Revenue provides a calculator that we have found helpful in working this out. Here is a link to the calculator. http://www.ird.govt.nz/calculators/tool-name/tools-t/tax-rate-estimation-tool-contractors.html
You will need information about your expected level of business income and expenses and your other sources of income. We can assist you to calculate the most applicable rate for you. When we complete your year end tax return we will check if you are using the best rate and will recommend a change if required. If your business changes significantly during the year you can elect to change you rate.
If you are a contractor working for a labour hire business under a labour hire arrangement, and have a good record of filing returns and making payments on time you can choose to apply for a special tax rate of 0% to be withheld. This will mean your usual provisional tax requirements will remain the same. This option will be especially useful for those contractors trading through a company and contracting to just one labour hire firm which triggers attribution rules. Here is a link for the application form http://www.ird.govt.nz/forms-guides/number/forms-001-99/ir023bs-form-special-taxcode.html . If this is your situation suggest touching base with us before you apply for a special rate and we can explain the attribution rules in detail.
Accounting for the tax withheld
If you are using Xero then it is a simple matter to set up a bank rule that calculates from your payment received the amount of contracting income, GST and tax withheld. Here is a link to adding a bank rule
To see examples: https://www.laurenson.co.nz/2017/09/accounting-for-the-tax-withheld/
Director – Laurenson Chartered Accountants LTD