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Guide to being a contractor

Whether you're new to contract work or a seasoned pro, there's a lot you need to know, learn and do. This guide will help get you up to speed.

Contracting is an amazing way of life. When you go out contracting, numerous benefits open up:
  • A better work/life balance: as your own boss, you can often determine where and when you work.
  • The potential to earn more money: as a contractor, you’ll get paid on an hourly rate, which is set at market rates. If your skillset is in demand, you could earn more money than if you were permanently employed.
  • The ability to test out different industries and workplaces on an impermanent basis can help you pivot into areas you hadn’t previously thought of exploring.
  • Contracting is becoming increasingly sought after by companies all over the world. Embracing the ‘flexible’ workforce is key for these organisations to attract the best talent possible, with the least amount of risk.

But there’s a lot that people don’t tell you about how to thrive as a contractor, and there are a lot of myths floating around out there. So to help, we prepared this guide that will help you navigate through the different aspects of contracting. If you’re new to the world of contracting, this guide will steer you in a direction that will hopefully get you more prepared for finding work and knowing what your obligations are. If you’re a seasoned contractor, this guide will provide some tools and insights that might have been previously missing from your toolbox.

Here’s what we’re going to cover:

In spite of all the awesome opportunities of contract work, it does come with many financial obligations that would normally be taken care of by a permanent employer.

For instance, Income tax, GST, ACC, KiwiSaver all get dropped on your plate when you become a contractor. And if you’ve been working in permanent employment your whole career, it can be very difficult to actually know where to begin. Planning for your future can be difficult, as you could be earning an income on an irregular basis.

Not only that, but there’s a lot of misinformation (what you need to do to get set up, for example) out there. For instance, it’s a common misconception that you need to be registered as a business in order to go out contracting. This is absolutely not true, and for those who were given this advice, it’s very likely that you’re doing twice as much tax paperwork as is needed (one return filing for you, the individual; one filing for your registered business).

This is just one of those common myths about contracting, and there are many others. So let’s kick things off by debunking some common myths and misconceptions that surround contract work.

Common Myths about Being a Contractor

Myth 1: You need to register as a business in order to be a contractor

Despite what you might have heard from various sources (accountants, NZBN, Xero, and many others), this is not at all true. In the vast majority of cases, you absolutely don’t need to register as a business in order to work as a contractor. As a sole trader, you can still claim expenses, register for GST and use a logo and trading name - there are little or no tax advantages to registering as a business, and you should really only consider it if you intend to actually run a small business - i.e. take on permanent staff, and have stock, inventory and creditors.

If you’re thinking of registering a company, you may want to check if this is the right approach for you. When you register as a business, you’ll not only need to make regular submissions to the Companies Office to keep your business name, you’ll also have to send them annual reports and other documentation. You’ll also need to file additional tax returns - as not only will you need to file your personal tax returns, you’ll also have to file Companies Income Tax (IR4) and company GST returns where applicable. Getting through all this paperwork may incur additional costs, and will probably involve you spending a lot of time wading through regulations that could have been avoided.

Myth 2: Working as a contractor means you won’t be able to grow your career/skills

Contracting gives you more flexibility in your day-to-day life, but it also presents plenty of opportunities to be exposed to different types of organisations, project managers, technologies, and styles of working – all of which will help you acquire new skills on and in-between a job. If you work multiple contracts concurrently (say, as a designer, with multiple different clients), you’re able to gain multi-dimensional experience that you wouldn’t get through permanent employment. You’ll also be able to meet people through your contracted work that might lead you to more contract opportunities as you progress through your career.

Moreover, you might have a couple of weeks available between contracts to work on developing new skills – either through online or in-person courses, hands-on workshops, training seminars, or some other means. At these training events, you might even be able to meet people in your industry and expand your network even further.

Developing new skills in this way will give you the opportunity to grow as a contractor and come across new jobs that you would otherwise not have had access to.

Myth 3: Being a contractor is less stable than being a permanent employee

There shouldn’t be much instability in work if you’ve got all the right things in place: ie, if you have a good (or developing) network of potential clients, if you maintain a wide range of relevant skills, if your CV is up-to-date, and if you ensure that you’re looking for new contracts about a month before your current contract is set to expire. There is a huge rise in contract work these days, across both government and private sector, and this can work in your favour. If you’re competent, professional and have a good set of skills, there’s no shortage of work. Conversely, when you’re in permanent work, you’re only one ‘re-shuffle’ away from being made redundant - so there’s never been a better time to go contracting.

The switch from permanent to contract can be difficult to navigate if you don’t get the right support (there is a lot of admin to keep track of, all of which is now no longer automatically handled for you by an employer). But contracting can ultimately be very rewarding. You have more flexibility in working, more opportunities to learn new skills, and, with the ability to work multiple contracts at once, more options to grow out your portfolio of experience.

So we’ve debunked some of the most common myths that surround contract work. But there’s still a lot of unnecessarily enigmatic information out there, primarily in regards to the differences between a contractor and a permanent employee.

What is the Difference Between a Contractor and an Employee?

Permanent Employees:

  • are paid a regular set salary or wage
  • have Income Tax paid on their earnings automatically by their employer
  • Have ACC levies taken paid on their earnings automatically by their employer.
  • Have Student Loan deductions paid on their earnings automatically by their employer
  • Can make automatic KiwiSaver contributions on their earnings, matched by their employer
  • Are entitled to holiday leave and sick days,

Independent Contractors:

  • are paid on an hourly or daily rate, often working on contracts of between 1 and 6 months.
  • are classified as ‘self-employed’ and as such must pay their own Income Tax, ACC levies and file GST returns (if applicable).
  • don’t get annual leave or sick days

If you’re going contracting, you’ll need to be aware of the following:

The Admin Stuff

Income Tax

Unlike a situation in which you’re employed on a salary/PAYE basis, when you’re contracting it’s your responsibility to calculate and pay the right amount of tax to IRD. Every year in April, you’ll need to file an annual Income Tax return (IR3) declaring all income and expenditure to IRD for the preceding year.

Withholding Tax

If you work through a Recruiter or other similar ‘labour-hire’, they may ask you to fill in an IR330C form, to specify a rate of Withholding Tax for them to deduct from your pay every time they pay you. This rate of tax is fixed for your entire period of employment with them, and it is worth noting that more often than not, it will be an incorrect estimation of your tax rate. An individual’s tax rate is very rarely a round number, and quite often, nominating an arbitrary rate on an IR330C form can leave you paying either too much, or too little tax on your earnings. Your employer or recruiter is not responsible for making sure that the tax rate you elect to provide to them is accurate, and so it is your responsibility to choose the right tax rate to provide.

Provisional Tax

When you submit an IR3 income tax return to Inland Revenue at the end of the Financial Year, if you owe more than $2,500 in income tax, you will be required to be subject to Provisional Tax payments in the following financial year. As part of the IR3 return, you will be asked to predict your income for the forthcoming year. Be aware - getting these predictions wrong, or deliberately fiddling your Provisional Tax predictions can result in fines and penalties. Being subject to Provisional Tax means that you will need to estimate your future income, and make 3 payments throughout the financial year, on a set schedule, to ensure that you’re paying your taxes in advance. Check out our guide to understanding provisional tax here.

Terminal Tax

If you are making Provisional Tax payments throughout the year, and these payments do not fully cover the tax owing on your income (for instance if you earn more than the income you predicted on your IR3 return), then you will be subject to Terminal Tax, which is the balance of tax owing. You must pay any Terminal Tax payments on or before the IRD due date.

ACC Levies

Whenever you file an IR3 tax return, IRD will inform ACC of your previous year’s earnings, and ACC will calculate how much you owe for your ACC cover and will send you a bill. Be aware that ACC bills may come out of the blue, without any warning, and they’ll likely be for a sizeable amount. In order to not get caught out over - or underpaying, you’ll need to ensure ACC has all the right information, and that they have you on the correct levy rate for the type of work you do. The default ACC work type is Manufacturing - which carries a very high levy rate, so it definitely pays to make sure that ACC has all the right information for you. Once you’ve got all of the right information to ACC, you’ll need to calculate and pay the three types of ACC levies (N.B. most accountants will not do this for you):

  • Earners’ Levy
  • Work Levy
  • Working Safer Levy

For more about ACC and understanding your ACC invoice check out our handy guide.

GST (Goods & Services Tax)

If you earn over $60,000/year as a contractor, you‘ll need to register for GST. Once registered, you’ll have to file regular GST returns on a 1, 2 or 6-monthly basis and make GST payments to IRD for any GST that is owing. Registering for GST means that you’ll need to charge your clients 15% extra for your services, and will be required to pass this additional income directly on to IRD. If you incur eligible business expenses, you are able to claim back the GST portion of those expenses and offset that against the GST you owe IRD from your income. If claiming business expenses, you’ll also need to keep receipts as records for 7 years. See more about what GST is and how it works here.

N.B. GST is something that is charged in addition to your income - it does not replace Income Tax or remove the need for you to pay Income Tax on your earnings.

Professional Insurance

Your contract may require you to have Professional Insurance (you may be able to have this provided by your recruiter). Otherwise, you’ll need to arrange this yourself and provide your recruiter/client with a valid insurance certificate. Professional Insurance usually covers two aspects - Public Liability Insurance and Professional Indemnity Insurance. Public Liability insurance will cover you for any detrimental impact your work has on members of the public - such as causing accidents or harm, whilst Professional Indemnity Insurance covers you for any negative impact your work might have on a client organisation you work for

Student Loan

If you’re a contractor, you’ll need to make sure you calculate and set aside enough money every time you get paid to cover Student Loan repayments, as IRD will expect this to be paid regularly on your income. Unlike when you have a permanent/salary job where your employer makes student loan deductions, you will be solely responsible for managing all student loan deductions from your contracting income.

Business Expenses

If you incur business expenses as part of your contracting work, you may be eligible for tax relief on those expenses. For example, if you purchase equipment in order to be able to perform your work, you will be able to lodge these as business expenses to reduce the amount of your income that you need to pay tax on. If you are GST registered, you may also be able to claim the value of the GST portion of the expense, and offset that against any GST collected from your clients.

Home Office Expenses

If you work from home as a contractor, you may be able to claim home office expenses to get a reduction in your income tax liability. You’ll need to calculate the claimable proportion of your utility bills in comparison to the size of your home office and make sure you hold on to all receipts. You can claim all sorts of things as home office expenses, ranging everywhere from utility expenses (power and Internet) to office supplies. It can be a challenge to figure out what can and cannot be claimed as a home office expense, and the portion of that which is claimable largely depends on how you measure out your home office. There are some pretty helpful resources out there, as well as our guide to household expenses, for determining how to apportion your home office area, all of which can provide some further assistance and insights.

Timesheets

When working as a contractor, you will be expected to log and track the hours you work for a particular client you work for. Your clients will not pay you for the hours where you are not present in their office or on site, and that includes lunch breaks, doctor’s appointments, or childcare commitments. There are multiple options for timesheets, from online apps to self-created spreadsheets. Depending on your needs and your unique lifestyle, it might make more sense to use one kind of timesheet tool versus another.

Invoices

Rather than automatically receiving a Payslip from your employer every time you get paid, when you are a contractor you may need to raise an Invoice to your client in order to have them pay you. Invoices must have a set format, and usually, you will need to wait a period of time after issuing the invoice for your client to pay - most clients tend to wait up to 20 days before paying an invoice! Some recruiters or other 3rd parties will raise what is known as a ‘buyer-created invoice’ - where they will create the invoice on your behalf, pay you directly and provide you with a ‘remittance’ specifying the earnings they have paid you. Buyer Created Invoices (BCI) are usually based on a Timesheet that you have provided. It is worth noting that you will need to hold on to all Remittance advices you are sent by your clients for 7 years, to maintain accurate records. Here’s our ultimate guide to invoicing like a pro.

Putting Money Away

When you’re a contractor, you won’t get paid holidays or sick days. This means that in times when you’re not working, you’ll need to have some money put away to cover your household and personal expenses. It is recommended that you put away enough funds to cover at least 2 months worth of your household expenditure. Here’s a quick article to guide you through planning for those dream holidays and unexpected sick days.

Work out how much you should charge

We’ve put together this handy calculator to guide you on how much you should charger for your services.

How to Find Work as a Contractor

Whether you’ve recently started looking for contract work, or have been a contractor for years, here are a few tips that might help the process of finding new contracts a bit more manageable:

Make use of your network. Know what you want.

Reach out to anyone you know (people you’ve worked with, friends and family, any contacts you may have in your personal directory) and inquire about any jobs that might be going. Chances are, if they know you, your skills and your experience, they might be able to connect you with people in their networks – and from there, things can start to really snowball.

There are a few things to keep in mind when finding contract work through your existing network, however – primarily in how to interact with potential clients. When approaching someone for a potential work opportunity, either through a casual coffee meeting or on a more formal cold call, be very clear about what you want to get from them. A potential client’s time is incredibly valuable. The more you take note of and appreciate them taking the time to meet with you, the more you stand out as a potential contractor.

Get connected to some recruitment agencies.

Recruitment agents are incredibly connected to companies and organisations that are actively looking for work. The sheer number of job openings and available candidates means going through a recruitment is most likely the most direct way of finding contract work, if your network leads turn up dry.

Find someone at a recruitment agency (it could even be as general as uploading an up-to-date CV to a known recruitment agency). Look for any opportunity to display your interest in a particular job.

How do you determine which recruitment agency to use? There are multiple types of recruitment agencies out there, ranging from IT recruitment to engineering recruitment, to hospitality. Understanding the type of work you’re looking for (or have come from) is a great first step. Are you looking for a long term placement? Or more of a short term contract? What type of contract work, industry, and organisations are you looking to be involved with? Check out the different types of recruitment agencies below. Some of these are massive, international agencies that don’t really have one area of expertise; others are more specific, such as The Creative Store and Beca; while some are more geared towards really empowering contractors, such as Potentia and Find.

It’s encouraged to visit the websites of some of the above recruitment agencies. Keep in mind what kind of work you’re after, and be sure to consult the job boards of a number of these agencies: some jobs get posted on one site, others get posted across the board.

Consult some online job boards

If the recruitment agency route doesn’t pan out, there are some more ‘indirect’ ways of finding contract work.

LinkedIn: LinkedIn is a rapidly growing resource for recruitment and can connect you with the people at companies that interest you. And who knows? You might actually know someone who works at a company you’ve always thought about working for, or in a field of work that you hadn’t previously given much thought to. Ensuring you have an up-to-date profile on LinkedIn is essential to finding jobs that fit your set of skills and experience.

Seek: New Zealand’s self-described number one employment marketplace, Seek is full of jobs. With thousands of opportunities listed, and hundreds added each day, Seek definitely features the greatest number (and variation) of contract jobs

TradeMe started out selling out physical items, but it’s since branched out into the property and job marketplaces. As with Seek, there are hundreds of available jobs on TradeMe, ranging from odd jobs (like a night watchman) to more long-term contracts.

Taking the Hassle Out of Contracting

If you’d rather not worry about the admin, even if you need help finding work, Hnry can provide you with the tools, support, and network that will let you really hit the ground running as a contractor.

Founded by contractors, the Hnry service not only handles tax calculations, payments and filings each time you get paid, but can also set you up with a wide-reaching network of recruitment agencies that can help you find contract work, and financial advisors that can help you plan for your future.

Hnry’s team of tax experts will manage your all your expenses, so you get the right tax relief.

As a registered tax agent with both IRD and ACC, we’ll represent you to these government agencies and ensure that you’re compliant and up-to-date on all of your obligations.

Before Hnry, recruiters were erroneously tasked with deducting Withholding Tax. This led to risky tax advice, recruiters essentially operating as non-certified tax agents. Hnry takes care of this aspect of contracting and ensures that contractors have their Withholding Tax deducted by a certified tax agent.

Complete Contractor Support at an Affordable Price

Hnry costs just 1% of your contracting income and with its ‘pay-as-you-go’ model, you’ll only have to pay for the service until you get paid yourself (in which case you will become linked to the Hnry tax agency). For that 1% fee, the Hnry service will provide you with the following:

  • Income Tax and GST calculations, filings and payments
  • ACC and Student Loan calculations and payments
  • Smart invoicing software
  • Electronic expense management, managed by a team of tax experts
  • The ability to create automatic payments to a savings account, investment wallet, or utility company – each time you get paid.
  • Optional professional insurance
  • Our support team is happy to answer all of your questions
  • We’ll even represent you to IRD and ACC
  • Access to a wide-reaching network of recruiters and financial advisors.

DISCLAIMER: The information on our website is for general educational purposes only. It doesn't cover all situations and circumstances, and shouldn't be taken as direct tax advice. If you're looking for specific help with your taxes, join Hnry and our team of experts can provide you with assistance tailored to your business needs.

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