Working as a contractor can be a great way to find a good work-life balance but if you’re uninitiated on the tax front, you might get stuck in several tax traps. Here are some tips to avoid trouble with IRD.

Employee or contractor?

To cut down on costs, more companies are switching to hiring contractors than full-time staff, but the lines may be blurred. Find out whether you’re a contractor or employee first by looking at your contract and asking yourself who has control. From there you can work out whether you’re responsible for your tax compliance, or whether this is in the hands of your

Withholding tax is not PAYE

Most contractors have a 20% withholding tax taken out of their earnings. However, if your rate is more than $30 per hour, you might end up with tax to pay at the end of the financial year. This is a typical problem for many contractors who may be often unaware that they need to file end-of-year tax returns.

Another common trap is not setting enough money aside to cover tax payments. It may be tempting to believe that all your income is yours, but you need to be disciplined enough to set some aside for expenses and taxes. You need to manage your money and avoid using money from your work account for personal expenses. Hot tip – Xero is a handy tool when it comes to tracking your income and expenses.

You’ll be taxed on your first year

While it looks like you pay no tax on your first year as a contractor, you actually do – you just don’t pay at the end of that year. You will need to start paying provisional tax (if your RIT is above $5,000) in your third year of trading. Some businesses face closure after two years and it’s often because of the tax they need to pay in the second year. The same goes for GST. It’s important to always put aside enough income for any tax payments you
expect in the future.  

Contractor taxes

As a contractor, educating yourself on tax compliance and getting advice from accountants is always a smart idea. After all, it is often a lack of understanding around tax that causes problems down the line.

While an accountant is not a requirement, it’s important for contractors like you to consider the value of hiring one. Is spending time on GST and tax returns the best way to use your time to grow your business? Do you really understand all the tax deductions that are available to you?

If you are having difficulty meeting a payment date or have made an error in your returns, give us a buzz and we’ll do our best to correct the issue as soon as possible. If you have
flick us a message and one of our tax accountants will get back to you quick smart.

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