Times have changed. Ways of working have shifted away from siloed permanent roles, and organisations across New Zealand and the globe have embraced flexible working through contract roles. As such, the work/life balance is becoming more and more distinct: some contractors can work from home should they choose, while freelancers can pick their own hours, adjusting their work to fit around their lives and not the other way around.
Self-employment, freelancing and contracting are commonplace, however some people are still unsure of whether being self-employed is for them. There are all sorts of myths floating around out there that really need debunking: should you register as a business; do you need to be registered for GST; what it means to have withholding tax deducted prior to payment; and so many more.
So we’ve compiled a list of the most common misconceptions about being a contractor:
Myth 1: You need to register as a limited company in order to go contracting
This is probably the biggest misconception around contracting out there at the moment. For the longest time, people have been mistakenly set up as a business – perhaps advised by someone else to do so. Most people think that by registering as a business you’ll be able to pay less tax on your earnings, but the moment you take money out of the business you’ll pay tax on it on the standard individual rates.
The only surefire way to lower your tax rate is to declare expenses throughout the financial year, and actually reduce the amount of income that you’re being taxed on. Registering as a business might sound like a sly way to dodge taxes, but in the long run it may actually generate more cost and manual overhead that you’ll need to wade through. In fact, if you’re taking dividends from a company, the IRD charge 28% company tax on those dividends, and then you’re taxed an additional 5% on those earnings – bringing your tax rate up to 33% anyway. So what’s the actual advantage?
If you stop to think about the extra admin required (ie filing two tax returns), and for what potential benefits, it becomes apparent that this approach might be overkill.
Will you be hiring staff and needing payroll services? Or will you have inventory, or be taking on creditors? Are you expecting to take on investors and eventually sell the business? When you’re just starting out as a contractor, freelancer or sole trader, setting up as a registered business is not a requirement. If you decide to take on the complexity of having a ‘small business’ you can always register that business further down the line. Going the other way however, and winding down a business once set up, can sometimes be tricky.
If you do choose to set up as a registered business you’ll end up with even more admin to do: this means two sets of tax returns - one for you as an individual, one for the business – which means two sets of expenses, two lots of paperwork, all of which adds up to an overly complex set-up. As the Director of a registered company, you’re also just as liable for the activities of that company as you would be for your activities as a sole trader.
Not only can the hassle be overwhelming, but there are also extra costs involved in registering as a business, maintaining company records, and perhaps even paying an accountant to file a tax return for your business as well as for you as an individual.
As a sole trader, you can still have a trading name and a logo. You can still have cool business cards with your name, title, logo, and trading name on them. You can still claim tax relief on your business and home office expenses, and register for GST, all without needing to register as a business.
I’ve unnecessarily registered as a business. What do I do?
After you’ve ceased operating as a business, you must file a final tax return that includes your business accounts up to the date that your business ceased to operate. This indicates that your company is no longer trading. Until you’ve filed your final tax return, you haven’t completed your business tax obligations.
You’ll also have to remove your company from the register and declare to IRD that your company has been deactivated, by filling out an IR433 form.
If your company is registered for GST, you’ll need to file returns up until the date you stop operating as a registered business, then you just need to deregister your company for GST.
Unless you’re looking to take on employees or sell your business in the near future, registering as a business will likely create a whole lot more admin for you to do, all of which is easily avoidable.
Myth 2: Contracting is less secure than a permanent job
Back in the days when contracting and freelancing were less common, there tended to be a lot more uncertainty around the job market. People were cautious to leave the security of a permanent role in search of more flexible working situations.
But with the advent of the gig economy and the rise of self-employment over the last decade, it’s never been easier to earn an income independently. Roughly 15-20% of the workforce are earning income from self-employment, and independent earning – through contracting, freelance work, and sole traderships – creates a vibrant and buoyant part of the economy.
Given this rise in independent earning and the ‘gig economy’, it’s also never been easier for companies to restructure you out of a permanent job. As a permanent member of staff, you’re only one ‘restructure’ away from being made redundant. In fact, things have now got to the point where having a permanent job no longer offers the same ‘job for life’ security it once did – thus making contracting and freelancing, with the right focus on growing skills (see below), a safer option.
Myth 3: The tax admin is too difficult
This is one of the main fears that many people have when contemplating the switch to a contracting role. Being self-employed does mean that all of that admin that would normally be taken care of by a permanent employer (things like taxes, payments, and ACC levies), would fall onto the individual’s shoulders. And all that admin hassle can feel like a full-time job in itself.
But with the introduction of services like Hnry, those perceived obstacles can be left in the rear-view mirror. Hnry automates the things you need done, solving the issue of the admin overhead and making it simple, accessible and affordable for anyone to earn an independent income.
When you’re freed from the hassle and confusion of the financial admin, you can focus on your work and your clients, without ever having to spend hours learning and worrying about taxes.
Myth 4: There’s no career development as a contractor
This one couldn’t be further from the truth. A perceived lack of career development has always been seen as a barrier to people becoming self-employed, but with the flexible work/life balance we’re seeing more and more people take to contract and freelance work specifically because it allows them to develop new skills in their own time.
With the rise of portfolio careers, these days it’s far more common for people to have multiple skills in different areas. We call these individuals ‘T-shaped’: they have one major set of skills and then several auxiliary, or outlying, skills with which they can go out and find more work.
The ‘T-shaped’ model can be seen in such examples as the web developer who leads after-work innovation seminars and workshops, or the entrepreneur who is a yoga instructor in their spare time, or even the real estate agent who drives for Uber in the weekend.
Add to the mix the increased access to affordable online training, and it becomes apparent just how available it is for someone to upskill and grow their knowledge. In New Zealand alone there are some great organisations, such as enrichme.io and WelTec, that offer some really useful courses that help spread the knowledge. Additionally, YouTube is a great channel for tutorial videos, while platforms like Code Academy and HubSpot offer qualifications and courses online.
More and more companies are starting to treat their self-employed workers like part of the family. When you contract with a company, you’re not a commodity resource, you’re a valued member of the team, and as a contractor it can often feel as though you’re treated just like a permanent member of staff.
Myth 5: It’s isolating and lonely being a contractor
This might have been the case a few decades ago, but with the emergence of video conferencing software, asynchronous communication apps, coworking spaces and online communities, it’s never been easier to work remotely or hot desk in one of the various shared locations in New Zealand alone.
In fact, lots of people are working remotely these days. These workers, often referred to as ‘digital nomads’, don’t just sit all on their own at a desk. They’re always collaborating using tools like Slack, Trello, Zoom, and Google Drive – to name a few.
And as more and more people are taking that leap into self-employment, organised events and meetups are becoming increasingly popular in communities all around the world. Engaging with one’s community is such an important part of expanding your network and meeting others in your profession. The Wellington Startup Garage, a meetup based here in Wellington, has over 3600 registered members!
Meetups have made it much easier for like-minded self-employed people to socialise; online industry-based communities such as Unicorn Factory, Freelancer Village and Design Assembly make it easy to connect with other people in your work sphere; and technological advances around ways of working have allowed us all to stay more connected, building strong connections, and perhaps even develop new opportunities that would otherwise be unavailable in permanent employment.
And with these advancements, it’s even easier for contractors and freelancers to work from home. Particularly if you have kids or parents to care for, or just generally other things on in the day, flexing your core hours can be incredibly beneficial.
“If my client or recruiter deducts Withholding Tax, I don’t have to pay any more taxes.” This is ONLY true if that recruiter has deducted the exact right amount of tax, which NEVER happens because your actual tax rate won’t be the round number that you indicate on an IR330C. So if you only rely on your recruiter deducting Withholding Tax, you’ll always end up paying too much or too little income tax. And keep in mind that Withholding Tax is only the first part of your income tax – it doesn’t include ACC, GST, or student loan.
“I need to register a company with companies office in order to register for GST.” This is absolutely not true. You can register for GST as an individual at any time - and if you earn over $60,000 from self-employment over a 12 month period, it will be mandatory to register for GST. Registering as a company creates a whole lot more admin for you, and is not at all needed in order to register for GST.
“I need to register for GST in order to send invoices to my clients.” Registering for GST has nothing to do with your ability to send out invoices. Your clients may ask that your invoices read ‘Tax Invoice’ somewhere on them, but there is no requirement to register for GST unless you plan to earn over $60k in a financial year. If you are GST-registered, you’ll need to adjust your hourly rates to incorporate the 15% collected in GST; but if you’re not GST-registered, you can still send invoices to your clients without collecting GST.
“If I use accounting software, I don’t need to keep my receipts for seven years.” If you have a bank account linked to your accounting software, you still need to upload receipts for all of your expenses. You still have to keep your receipts, even if you have the software hooked into your bank account - as if you ever cancel your subscription, you won’t easily be able to get access to your receipts any more. As a tax agent, Hnry is required to hold your receipts for seven years, regardless of whether you’re still an active Hnry customer. We store your expense receipts and income/tax reports in a kind of personal digital vault that you can access at any point, so you’re never beholden to a specific software.
“My accountant can stop me getting audited”. No one can stop you from being audited – not even an accountant. When it comes to your tax bill, the expenses that you’ve claimed for, and the income that you’re actually being taxed on, it’s your responsibility (and therefore your obligation) to make sure the information you provide is accurate. Otherwise, you might end up with several tax horror stories, come year-end. And in the case of an audit, your accountant can provide records to IRD but you’ll be responsible for any claims made throughout the year.
“Ahhh, I won’t get audited.” Well, what if you did? Is being audited and getting hit with an avoidable tax bill worth it? Operating within the lines and policies of IRD is the only way to avoid getting caught. IRD aren’t spending taxpayers’ money trying to find people who are doing the right thing – they’re putting all their resources towards people who are operating at the fringes: claiming things they shouldn’t and trying to get away with it.
A World of Opportunity
The truth is, contracting is not as tricky as it used to be. Hnry has made it a lot simpler to earn an income as a contractor. We automate the tax payment and filing process, provide expert support around expense claims, and provide you with real-time financial reports and planning tools. With Hnry, you can set up automatic contributions to your KiwiSaver, investment portfolios, and savings accounts, to ensure that you’re setting aside money for your future.
A lot of the challenges that used to be associated with earning independently have been solved by new technologies and services, and the shifting attitudes towards the work/life balance have given more and more people access to flexible working schedules.
Yes, there is a lot of misinformation out there, but this collection of mythbusters should hopefully provide some clarity and help empower you to go out and earn with confidence. There is a lot of opportunity in the changing landscape of work; Hnry is here to help you take advantage of those opportunities, and we’ll provide you with all of the resources you need to thrive as an independent earner.
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