Becoming your own boss by contracting for work, rather than working for an employer, can be a liberating experience. The freedom to manage your own performance and be solely responsible for the outcomes can be refreshingly challenging and rewarding. It’s certainly quite a different way to earn an income and grow your career.
Whether you’re just tossing the idea around, or recently took the plunge, or are already a seasoned contractor, this guide provides information, tips and tools to help you make the most of your skills.
What are the benefits of becoming a contractor?
Contracting is not for everyone and each person who works this way has their own reasons for doing so. Here are some of the more common benefits contractors enjoy:
- The chance to earn more money by building a strong reputation as a trusted provider of in-demand skills and/or services
- Be paid more whenever you work more
- Have greater freedom to set your own work/life balance by working when and where it suits
- Experiencing different company cultures, industries and applications of the skills you have
- Broadening your horizons by working alongside a more diverse range of people and skill sets
- Choosing to work for someone rather than having to, and knowing you’re helping to provide the talent they need to succeed
As organisations around the world discover the benefits of a more flexible workforce, the use of contractors is steadily growing. The Covid-19 pandemic has now shown most organisations that remote working can be effective. Hiring contractors, rather than permanent employees, also gives many organisations the nimble agility required to succeed in today’s rapidly evolving markets. They can quickly acquire the talent they need for the time they need it, without carrying ongoing costs and risks.
What are the added responsibilities when you’re a contractor?
Being your own boss means you have to take on some of the financial responsibilities that an employer would look after on your behalf. This can include:
- KiwiSaver contributions
- ACC contributions
- Student loan repayments
- GST and income tax payments to Inland Revenue
- Keeping financial records
- Budgeting to allow for an irregular income
It can seem a bit overwhelming at first, but there’s plenty of assistance available and this guide will help you prepare by covering the main points. Let’s start with some of the misinformation you might hear from well-meaning people, who perhaps don’t have your courage.
Learning and skill development as a contractor
Many people believe that once you start contracting, the opportunities to learn from talented people and grow your career will be gone. It’s simply not true.
Contracting exposes you to a much larger group of people to learn from. Chances are, you’ll experience different people management skills, project management strategies, technologies, working environments and more. You’ll be able to recognise and acquire the skills you need to grow. You’ll also become a valuable resource able to draw on your varied experiences to bring additional benefits to clients. Your work network will grow with each new client, increasing the number of people out there who can recognise your potential and present opportunities to grow your career.
Between jobs, or in time you set aside, you can develop new skills and interests through online courses, in-person training workshops and industry association meetings. All of these can provide further opportunities for networking, picking up tips and ideas, and keeping yourself front-of-mind with others for job referrals.
Avoiding times without work as a contractor
One fear that stops many people from contracting is the possibility of having long gaps with no income. They see employment as a much safer option financially. But if you’re motivated and what you’re good at is in demand, you should have minimal instability in work. It’s just a matter of being organised and prepared by doing things like:
- Maintaining a network of potential clients, by staying in touch without becoming a nuisance
- Keeping your skills up to date, by setting time aside to read, meet others, listen and study
- Keeping your CV up to date and ready to go
- Looking for work a month before you’ll need it and letting people know when you’re becoming available
- Making it easy for potential clients to find you and get in touch, by having a search optimised, well-written website and Linked-In profile
Permanent employment is never guaranteed either, no matter how motivated and skilled you are. In fact, many people go contracting because they’re tired of being laid-off in yet another restructure. They recognise their ability and simply want more control over their income and career.
You don’t have to set up a company to be a contractor
There are quite a few things to set up as you become a contractor. Some people might even insist you have to register as a business and even establish a company. This is not correct.
As a contractor, sole trader or self-employed person (which are just different names for the same thing), there may be no advantages to registering as a company. It’s more for people who plan to run a small business with things like permanent staff, stock and business loans. Contractors can still register for GST, claim work-related expenses, use a trading name and even have a logo and website, just like a registered company does.
Once you’re up and running as a contractor, you may want to register for a New Zealand Business Number (NZBN), but you don’t have to be a company to do that. To learn more, see the NZBN website.
How is working as a contractor different to being an employee?
Here’s a quick overview of the main differences between being a contractor and an employee.
|May or may not have a formal contract for services, usually called an ‘independent contractor agreement’.||Must have a contract for services usually called an ‘employment agreement’.|
|Invoices clients based on an agreed hourly/daily rate or quoted price for a job, usually for no more than six months.||Is paid a salary or wage on regular pay days, and it must be at least the minimum wage.|
|Is responsible for paying own income tax, ACC levies, GST return (if registered), student loan repayments and (optional) KiwiSaver contributions.||Employer is responsible for automatic pay deductions for income tax, ACC, student loan repayments, and both employer and employee KiwiSaver contributions.|
|Is not paid for public holidays, annual leave, sick leave or bereavement leave.||Is entitled to be paid for public holidays, annual leave, sick leave and bereavement leave.|
The difference between contractors and employees is usually quite clear. However, if you’re on a long-term contract it might be a little harder to tell the difference. An employer can’t simply call you a contractor to avoid some of their responsibilities as an employer. For official definitions and associated legal tests, see the Employment New Zealand website.
How much accounting work does a contractor have to do?
Working as a contractor means you have to be your own accounting and HR departments, as well as sales and marketing of course. The accounting side can seem a bit overwhelming, but many self-employed people use cloud services like Xero to make things easier. Some hire an accountant for the larger jobs like preparing your annual accounts and filing an annual tax return. Here’s a brief summary of the main things you may need to take care of:
As a contractor, you’re responsible for working out how much income tax you have to pay to Inland Revenue and getting it to them on time. It can be quite straightforward though, provided you keep good records.
- As a sole trader, you have to let Inland Revenue know you’re self-employed, use your personal IRD number and file an IR3 income tax return at the end of each tax year.
- Partners in a partnership each file an IR7.
- Companies file an IR4.
You’ll pay tax on your overall profit, which is basically your annual income minus your qualifying business expenses. The financial year ends on 31 March and income tax returns are due on 7 July. In your first year, if you pay your tax before 31 March you may qualify for a 6.7% income tax discount. Obviously, it’s important to set money aside during the year to be sure you can pay your end-of-year tax.
If you are going to pay more than $2,500 in annual tax from your second year onwards, you have to pay your tax in advance in instalments during the year. This is known as provisional tax. Here are the ways you can choose to calculate it:
- Standard – this is the default option, where you add 5% to the tax you had to pay the year before or 10% to the tax you had to pay two years ago
- Estimate – you simply estimate what your tax owing will be for the year, which can be a useful method if your income will be less than the year before
- The accounting income method (AIM) – this is done using accounting software that performs the calculations for you at the same time as your GST returns, so it provides smaller, more frequent payments based on your actual income
- Ratio – similar to the AIM option but you use a percentage of your GST return and pay in six instalments, which can be helpful if your income is uneven during the year
If your provisional tax payments don’t cover the tax you end up owing on your annual income, you will have to pay the difference to Inland Revenue by a set date. This is known as terminal tax. If it turns out your provisional tax payments were too much, you can apply for a terminal tax refund. This can be paid out to you or held as a credit for next year. It’s up to you.
Goods and services tax (GST)
Contractors earning more than $60,000 a year before income tax must register for GST with Inland Revenue. It basically means you become a tax collector for the government. You have to add 15% onto what you charge clients and pay that to Inland Revenue, less the GST you have paid on qualifying business expenses. You still have to pay income tax. You can choose to file a GST return and pay GST monthly, two-monthly or six-monthly, unless you earn more than $500,000 a year, in which case it can’t be six-monthly. And if your business happens to earn more than $12m a year, it can only pay GST to Inland Revenue monthly. There are set dates for each filing frequency.
Tax on schedular payments
This used to be known as withholding tax. If you’re employed as a contractor by a labour hire or temping company to work for their client, they’ll deduct income tax before they pay you. You’ll be asked to specify a tax rate using an IR330C form. That rate will be used for the entire time you work through them. It’s your responsibility to choose the right rate, so you don’t end up underpaying or overpaying tax on these schedular payments.
This is another payment that will occur at the end of your first year. Once you file your first income tax return, ACC will send you an invoice based on your type of work and the amount you’ve earned. ACC has levy calculators to help you estimate how much to set aside.
After your first year, your ACC invoices will usually arrive around August or September each year. These will include an invoice for the coming year, based on the previous year’s earning, and a levy adjustment charge or refund, depending on whether you underpaid or overpaid the previous year.
Each annual invoice includes three levies:
- Work levy – covers workplace accidents and is based on your type of work
- Earners’ levy – covers accidents outside of work and is the same for everyone
- Working safer levy – supports Work Safe New Zealand activities and is also a standard fee
As soon as you begin working as a self-employed contractor, you’re automatically covered by ACC’s CoverPlus. You have the option to switch to CoverPlus Extra, which gives you choices around how much of your income ACC will cover. It’s one way to reduce the levies you pay.
If you need time off work to recover from an injury, ACC will pay a weekly amount equivalent to up to 80% of your previous year’s self-employed earnings. What you’re actually paid depends on the type of cover you have and how much you earn.
The tax on schedular payments (previously called withholding tax) does not include ACC levies, so if you’re receiving these payments, you’ll still have to pay ACC levies based on that income.
Student loan repayments
When you’re self-employed and have an outstanding student loan, you still have to make regular repayments if your annual income, minus qualifying expenses, is above a set threshold. For the 2022 tax year, the threshold is $20,280. This means calculating and setting aside regular deductions from your contracting income. To learn more, see the Inland Revenue website.
If you pay for something as part of your business or contracting, such as work-related equipment, it may qualify as a business expense. If so, you can subtract the cost from your income and reduce the tax you have to pay. If you’re registered for GST, you can subtract the GST on work-related purchases from the GST you collected from clients, then pay the balance to Inland Revenue.
If you work from home, you may be able to claim home office expenses. This can include a portion of some household expenses, such as power, internet, rates, insurance, and rent or mortgage interest. The portion you claim is based on the floor area of your office compared to your home’s total area.
To claim vehicle expenses, you’ll need to use a logbook to record business mileage. You then calculate the percentage of total use that was business related and claim that percentage of your vehicle expenses.
It’s essential to keep all expense receipts and other records for up to seven years, in case you’re audited by Inland Revenue.
Tracking your time on the job
As a contractor, you may be paid on an hourly or daily basis, or for a quoted price to complete a job. If you’re paid hourly, this is unlikely to include lunch breaks or things like medical appointments during the working day. If you’re charging a daily rate, you might be expected to make up any time taken off work during the day.
However you’re paid, it’s important to keep track of the hours you work for each client. This makes invoicing much easier and avoids the risk of over or under charging. Even if you’re working on a fixed price job, tracking actual hours worked helps to keep you on budget and improves the accuracy of future quotes.
The secret to good time keeping is to make it as easy as possible. Depending on the type of work you do, that can mean using a pen and paper diary, a spreadsheet or one of the many online apps.
Getting paid as a contractor
If you’re working through an agency, such as a labour hire firm, they may pay you based on a timesheet you fill out as you work. They’ll usually send you a remittance advice each time. It will state how much you were paid and when. You’ll need to keep a record of these for seven years, in case you are audited by Inland Revenue.
In most other cases, you will send your client an invoice. This will be at an agreed time, such as on completion of a job, or for work completed to date either fortnightly or monthly. The Business NZ website has a clear list of what to include in each invoice. It also provides a free template to help you get started.
Online accounting software, such as Xero and MYOB, makes it easy to create and send invoices, as well as keep track of whether an invoice has been paid and when. Again, you’ll need to keep a record of all invoices sent and payments received for at least seven years.
Managing money as a self-employed contractor
It’s important to create a budget and plan ahead for tax payments and business expenses. Having a separate bank account for your business can make it easier to track income and work-related expenses. Setting money aside on a regular basis – to cover things like GST payments, income tax and ACC payments – will help to ensure you don’t spend money that isn’t really yours. You might want to open a separate bank account for these payments. As a contractor you’ll also need to set aside ‘holiday pay’ for when you take a break. And finally, creating an emergency fund, to cover times when you might have little or no work, can save a lot of stress. Most experts recommend setting aside two to three months’ worth of living and fixed business expenses.
How to get work as a self-employed contractor
Although more and more businesses are using contractors, there are also more people choosing to go contracting every day. Some people find it hard to actively promote themselves; it can feel like showing off. But the reality is, unless people know who you are, the benefits you can offer them and how they can get in touch, they’re never going to give you work.
So here are some tips to help you get started or increase demand for your services:
Take time to get your story sorted
Before you start testing the market to see if there’s enough demand for what you offer, or start putting yourself out there, it pays to clarify what you want to do and why (other than to make money).
You might find it helpful to think about what you enjoy doing in life, what you’re really good at, what people would pay you for and what the world needs. Finding something that fits all four categories is known as ‘ikigai’. It’s a Japanese concept of your reason for living; a truly rewarding sense of purpose and motivation. You may not be there yet but knowing what it is for you can help guide you towards it.
Once you’ve decided what you’ll do as a contractor and why, focus on the benefits it offers clients and who needs those benefits the most. In other words, define your target market. Now answer the everyday question, ‘what do you do?’. But answer in terms of the benefits you offer and what sets you apart from others. So instead of saying ‘I’m a plumber’ you might say ‘Well, I like taking stress out of people’s lives and I’m an experienced plumber, so I contract to plumbing and construction businesses that are short on staff or a bit out of their depth’. If there’s time you could continue with something like ‘I get a kick out of helping to make their business successful by providing an immediate and reliable solution to the challenges they’re facing’.
Make it easy for potential clients to find you
Once you know the sort of work you want and who your ideal clients are, it’s time to let them know.
Creating a simple website is very easy these days. It’s a place to share your story, what you offer and how people can get in touch. It helps you look like the real thing and lets clients remain anonymous while they check you out before giving you a call. It also means you can quickly hand someone a business card and suggest they visit your website to find out more.
If you’re not certain where demand for your services is strongest, you might want to test the market for a while, then refine your offering before launching a website after your first few jobs.
The next step is to let all your friends, ex-colleagues, neighbours and family know what you’re now doing and why. Share your exciting new story but keep it brief and ask them to let you know of any opportunities. Also ask them to refer anyone they think might be interested. Mention or include a link to your website if you have one.
Here are some more tips for finding the work you want:
- Update your LinkedIn profile or create one for your business, and link to your website
- Find the recruitment agencies or labour hire companies that specialise in your type of work, ask to meet them and take an updated CV with you
- Look for suitable contract jobs on agency websites, as well as TradeMe, Seek and LinkedIn
- Even if you see a permanent position requiring your skills, you could contact the employer and let them know you do contract work in that area; it’s possible they won’t find the right person straight away or need a short term extra to clear a backlog of work that’s built up during the recruitment process
Getting trusted advice to set up as a contractor
It may look challenging to establish yourself as a contractor, but there’s plenty of information and help available. It always pays to get advice from an experienced professional, such as an accountant, business adviser or lawyer before taking the plunge. Tell them about your goals and ask them to steer you in the right direction or point out the common mistakes people make.
To learn more
- Visit the government’s Business NZ website