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.
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.
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 http://laurenson.co.nz/xero/
Some contractors are required to have tax deducted, others can choose to do so.
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.
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.
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: http://laurenson.co.nz/2017/09/accounting-for-the-tax-withheld/
Director – Laurenson Chartered Accountants LTD