Setting up your business as a Contractor

As a Contractor, you need to think of yourself as a business of one. With this in mind to avoid snags along the way you need to address the commercial aspects of setting up as a contractor. 

1. Keep on the right side of the IRD.

As an independent contractor, you will be viewed in the eyes of the law as a company. In fact, you may choose to register a company to be the entity through which you contract out your services. Check out the IRD website for more on this as they have a useful tool to take you through things. You need to take care in understanding your obligations including the conditions that must be satisfied for you to be eligible to engage as a contractor.

Employee or Contractor?

Speaking plainly there are some tax benefits in being a contractor (you may pay less tax by claiming expenses for example) that are not available to regular employees, so it’s important to the IRD that you can show you’re not just avoiding paying tax! Check this link out (pdf) to ensure you are eligible and will remain eligible to contract.

Income tax

You need to manage your income tax obligations yourself. This will not be done for you, as it is when you’re an employee on PAYG where your employer retains the tax and pays it to the IRD on your behalf. When you are paid your contract fees, you will have to pay income tax on these. So make sure you don’t spend it! Seriously, many people do and then have large tax bills with the IRD. Put a conservative amount of tax aside. Get an accountant to help manage this.

GST

Another form of tax that may be paid to you in your fees, which amounts to 15% in New Zealand. Step 1 – register for GST. Step 2 – keep the GST you receive to pay the IRD. You can claim GST on items purchased for your business. Once again, get an accountant.

Claiming expenses

Know which expenses you can and can’t claim on. The IRD’s Tool will help understand this. Or, yes you guessed it, get an accountant.

One simple solution that we recommend to contractors is to engage a contractor management and payroll organization who can handle most of the above on your behalf. They tend to enable tax savings for you that effectively fund their services. Talk to one of our contracting team if you want to know more.

2. Manage your finances

If you missed the two prompts above – you really should get an accountant! As above there are tax, expenses and GST that can be claimed but unless you want to do the accounting yourself (not recommended) get a professional.

3. Invoicing capability

You’ll need to invoice whichever company hired you, likely on a monthly basis for the services you’ve provided. This can be as simple as using a template created in a spreadsheet or word document, but needs to contain key information such as your name (and your company name), your GST number, your bank account details, the hours worked and your rate along with a total including GST (if you’re registered for this). An accountant can also help you with this.

4. Have a rainy day account

Funds for when you take any kind of leave or for use if you happen to be out of work in between contracts. The cushion offered by employers around sick leave and annual leave, may not seem that comfortable until you no longer have it!

Indemnity & Liability

Most independent contractor agreements that you sign will require you to accept liability for breaches of statutes or regulations that may happen during your contract. In addition, you’ll probably be expected to indemnify one or multiple parties for direct or even indirect losses and damages that they may incur due to any breaches or negligence on your part. Serious stuff? Well yeah you need to be across this and understand these scenarios from both a legal and insurance perspective. You’ll probably need to (and should) carry both public liability and professional indemnity insurance, which of course carries a small cost too. Get an insurance broker and ideally a lawyer. You need to know where you stand and you need to have protection. Be proactive not reactive.

Simply put you’ll need to do some work to set yourself up properly as a Contractor. Once this is done however, the actual ongoing administration overhead is not particularly large. Let us know if we can be of any further help along the way and please contact us if you need further help