We often use the term ‘sole trader’ to encompass all manner of self-employed people. But there are many different kinds of sole traders, who work in many different industries, and who may have different tax rules that apply to them. Like contractors.
What is a contractor? The first thought that comes to mind is a person, in a well-cut suit, briefcase in hand, probably hurrying to an important meeting. Though they usually do tend to be white-collar workers, there’s a bit more to them than that.
Fairly self-explanatorily, contractors work on a contract, rather than being employed full time. They’re often brought in because they have a specific set of skills that are useful for a particular project, or because a business needs an extra pair of hands for a limited period of time.
What do contractors do, and where can you find them?
So apart from being an absolute asset to the workforce, what kind of work do contractors actually do? Well, it really depends on the skills of the individual contractor.
For example; one contractor may specialise in state-of-the-art security system installations. Another may be an HR specialist and the go-to for implementing new recruitment initiatives.
More often than not however, contractors tend to be white-collar workers, and their skills are often needed by businesses that deal in information management, engineering, specialist I.T consulting, policy, accounting, and government organisations. Just to name a few common industries.
Contractor taxes
If you’re a contractor, chances are you’ve come across withholding tax. In a nutshell withholding tax is a percentage of your income (usually agreed upon between you and your employer) deducted as income tax by your employer or recruiter and given to the IRD on your behalf. Depending on how much you earn and your nominated tax rate, you may end up under or overpaying your income tax.
For example; let’s say you have an effective income tax rate of 18%, and you and your employer agree to the minimum rate of 10% withholding tax. What this means is that your employer will deduct and pay 10% of your income as withholding tax. The remaining 8% owed will still need to be managed manually.
💡 An effective tax rate is exactly what it says on the tin: the actual percentage of your total income that you pay in taxes. For more information, check out our guide to tax rates for sole traders.
Or, you can let Hnry handle it!
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