Tax and the IT contractor

In general, independent IT contractors and sub-contractors are self-employed people who control what work they do and how it’s done. They provide the tools, equipment and expertise needed for the job, and then invoice their client for their time and service for each month usually at the end of that month.

If they’re not performing a “schedular payment activity” their clients don’t need to deduct tax from their payments. But clients are required to keep records of the sole trader person or company and what they had been paid – based on the tax invoice the contractor has submitted up to a particular date.

If you are a self-employed contractor then you aren’t an employee. This means you don’t have to have PAYE tax deducted by your client from income paid to you as per your invoice. The one exception is, where some earnings, known as “schedular payments”, are paid you. Schedular payments have to have tax deducted by the client (at schedular income tax rates) before you, the contractor, receive your final payment. .

As an independent contractor you’re responsible for meeting your own tax obligations.

Some of the minor headaches IRD have with contractors involve:

  • Not filing their IR3 income tax returns on time.
  • Not declaring their full net contract income on their IR3 tax returns.
  • Not being registered for GST when their turnover is more than $60,000 per year.
  • Not accounting for GST on their income when required.
  • Claiming private expenditure against their income.
  • Incorrect splitting of their income with their spouse.


Tax is payable on your profits

If you’re a sole trader the net income from your business is basically your wages from the IT contracting operation. You pay tax on your business income just like you would if on a wage or salary.

You take out as drawings any money you need during the year but at the end of the year (“tax year”) your business net profit is worked out and you will pay tax on that figure not on the total drawings you’ve taken. So what you take out and use during the year has no bearing whatsoever on what you will be taxed on.

Tax obligations of an IT contractor

This covers the things you must do to register for tax and when you employ for the first time.

  • Advice – Obtain business and tax advice from a Tax Accountant or Tax Specialist
  • IRD Number – All businesses need an IRD number so apply to IRD for one.
  • GST – Typically, if your business has a turnover of more than $60,000 a year, you must register for GST.
  • Business Structure – Decide on our business structure. The way you set up and operate your business means you will have tax obligations that are relevant to your particular operation so be sure the structure you select is the one you want to use. .
  • Records – Set in place systems for keeping good business and tax records
  • Sub-Contractors.
    If you employ contractors, whether they’re based in New Zealand or brought in from overseas, make sure you are familiar with all the tax rules. If you’re a contractor in business you’ll avoid common tax mistakes so you don’t end up with a big tax bill to pay at the end of your tax year. If you’re a non-resident contractor, get in touch with IRD to get your tax status confirmed so that the people you work for can be sure you’re getting your taxes right.
  • Child support.
    If you are an employers you must deduct child support from an employee’s pay and send it to IRD if they request this.
  • Kiwisaver.
    Since 2013, employers must pay an employer’s contribution to their employees’ KiwiSaver funds (a minimum of 3% of their before-tax pay).
  • Student loans.
    Student loan repayments should be deducted from your employees’ pay after deduction for PAYE and child support.
  • Employer – If you’re a first-time employer you need to register with Inland Revenue.
  • Staff Tax Codes – make sure staff you employ have correct tax codes for PAYE deductions
  • Fringe Benefits – If you provide employee benefits or perks then you may need to pay fringe benefit tax (FBT) and file FBT returns during the year.
  • Grants and GST – If you’re a GST-registered businesses that has received a government grant or subsidy, you are liable for GST.
  • Withholding Tax – In certain circumstances, businesses need to register to pay resident withholding tax (RWT).
  • Tax provision – set up separate bank account for saving funds for payment of GST and tax.
  • Ceasing Business – If your business has stopped all taxable activity and won’t resume that activity within the next year, you have to cancel your GST registration.
  • Business Structure – Decide on our business structure. The way you set up and operate your business means you will have tax obligations that are relevant to your particular operation so be sure the structure you select is the one you want to use. .
  • Buying a Business – If you’re buying a business or franchise you need to learn about what GST implications this has.
  • Records – Set in place systems for keeping good business and tax records as having good records help when completing your financial results including accurately calculating business expenses you can claim plus your GST liability.

Claiming what expenses?

It is this area that a good accountant really comes out on his or her own. Their knowledge and courage to claim the maximum for you that the law allows means a lower tax bill and thus savings of hundreds and even thousands of dollars. Good accountants can generally save you enough money to pay for their fees while still leaving you with extra money in your pocket. That equals free accounting it’s well worth looking at. Some contractors prefer to engage a contractor management and payroll organization to handle most of the above on their behalf.

 

The criteria for expense deductibility

In general you can claim any cost whatsoever that is related to and necessary for earning or generating the income on which your contracting business will be taxed. The criteria is not whether the costs are those that others have claimed in the past or whether it’s generally allowed by IRD – the criteria is whether the costs you incurred were necessary for generating your business’s income – the income on which you will be taxed.

That’s it – period.

It is totally irrelevant that no one else had ever have claimed that particular expense before.

 

 

2017-08-28T03:50:17+00:00