We often use the term sole trader as a blanket term to describe certain self-employed or independent earners.
But there are actually many different kinds of sole traders, working in many different industries.
For example, freelancers.
What is a freelancer?
Good question, because the name itself doesn’t tell you much about what they do. The term “freelancer” actually goes back to the 19th century, when it referred to a medieval mercenary who would fight for whoever paid them more – a “free lance”.
Nowadays we use it to refer to a certain kind of sole trader, sans sword and armour. The principle is still the same, however – freelancers will loan out their services/skills to their clients at a price that factors in their time, effort, and resources.
What do freelancers do for work?
So we know what a freelancer is and how they’re slightly different from other sole traders. But we haven’t established what it is they actually do for work.
Here’s a quick list of industries and types of work that freelancers tend to favour:
Design and creative
When you think of a freelancer this is most likely what comes to mind. Creative freelancers do just that – be creative. A job like this could look anything like graphic design, photography, videography, video editing, web design, and pretty much anything else you can think of in the creative industry.
Writing
Now this doesn’t just mean in the typical sense of authors and journalists. Writing can also mean technical writing (think instruction manuals and guides), or copywriting and content writing (for websites, social media posts, blogs or newsletters). Translators and interpreters are also freelancers, who typically convert written material from one language into another.
Administration
Moving away from the creative industry, freelancers who are in administrative roles are typically hired to support a system function, or a client directly. Jobs in this industry include: customer service coordinators, virtual assistants, project managers, and database managers.
These are just the most common industries but there are so many more. For the sake of time, here’s an extra quick list of honourable mentions:
- Development and IT: web designers, product designers, analysts and engineers.
- Sales and marketing: social media marketing, SEO specialists, and content creators.
- Finance and accounting: investors, bookkeepers, advisors.
What makes freelancers sole traders?
As we said earlier there are lots of different types of sole traders. But what is a sole trader you might be wondering?
A sole trader is someone who is self-employed, in other words, they work for themselves. Freelancers are sole traders because even though they sometimes may be engaged by a company to complete work, they are not employed by that company.
Unlike a full-time employee who is employed and paid by the company they work for, freelancers are responsible for the running of their business, which is a full-time job in itself. This is not the only difference between freelancers and full-time employees, however.
Freelancers vs full-time employees
Flexible schedules
Unlike full-time employees who work to a schedule, often provided to them by their employer, freelancers are flexible. They choose when they work, how often, and where they work – at home, in the office, or even from a remote location.
Growing their own network
If you’re working full-time for a company or agency, you’re doing work for that agency. Freelancers run solo, so when it comes to growing their business, they have to market themselves and put in the hard yards to get their work seen by others so they get hired or commissioned.
The good thing about this is that freelancers have total ownership over their work; their name is on whatever they create. And if their client’s love what they do, this means repeat business which could result in a loyal customer base.
Setting their own rates
If you’re a full-time employee, you’re earning a salary or wage which doesn’t tend to fluctuate too often. Freelancers set their own rates as they’re often commissioned for one-off projects, which may not be as predictable as a salary.
Setting your own rate can be a real perk because it means you can decide how much your work is worth. As we said earlier, freelancers factor in their time, effort, and resources which all contribute to the overall price of their product/service.
Claiming business expenses
If you’re a full-time employee in Aotearoa, you can’t claim business expenses. For freelancers, however, it’s highly likely they’ve made purchases for their business that were needed to complete a job or project. These purchases (if valid) would be considered claimable business expenses – but more on that later.
Freelancers vs. other sole traders
You may have heard the term ‘Contractor’ floating about. Contractors are also self-employed sole traders, but they’re not the same as freelancers.
Instead, there are a few key differences.
Number of clients
It’s not uncommon for freelancers to be doing work for multiple clients at a time, as they’re often commissioned for one-off projects. This is unlike contractors, who typically have one or two clients they contract with for a period of time, so they can focus on just one or two businesses.
Invoicing vs. Schedular payments
Freelancers usually receive their income by invoicing their clients once they’ve finished a project.
Contractors, on the other hand, usually get paid straight to their bank account by their clients, without having to invoice. They may also receive schedular payments. Schedular payments are a specific type of payment made to contractors in certain industries. Contractors who receive schedular payments will also need to pay a specific type of tax on those payments (we’ll get to this in a literal second).
Withholding Tax
Withholding Tax is a type of tax that is paid by people paying schedular payments. It’s designed to help cover your final income tax bill by making regular payments throughout the year.
It sounds like PAYE tax, but Withholding Tax is deducted at a flat rate from your pay. Freelancers may be subject to Withholding Tax, but not as often as contractors are. It really is dependent on the industry.
Taxes for freelancers
As a self-employed individual, freelancers need to take charge of doing all their tax admin. Let’s go over some of the important tax stuff that freelancers should know about.
Income tax
Sole traders are responsible for calculating and paying their own income tax. How much you might owe depends on how much you earn across the financial year.
📖 For more information on how to calculate income tax, check out our guide to tax rates for sole traders.
Business expenses
The types of expenses you can claim as a sole trader vary from industry to industry. Knowing what business expenses you can claim as a freelancer will help you maximise your tax deductions, and lower your taxable income which means more money in the bank.
📖 If you’re not sure what you can and can’t claim, check out our monster guide to business expenses.
ACC levies
In Aotearoa, if you earn an income, you’re required by the government to pay ACC levies.
If you’re a PAYE employee this is automatically calculated for you and deducted by your employer, but, if you’re a sole trader, you’re responsible for calculating and paying all three ACC levies on your own.
📖 Confused about ACC levies? We explain it all in our ACC guide for sole traders.
GST
In short; as soon as you think you’re going to make over 60k in self-employed income in a year, you must register for and charge GST. If not, you could be slapped with a hefty GST bill come the end of the financial year.
📖 You guessed it – we have a guide to GST as well. Whoo!
Hnry for freelancers
All that tax stuff sounds like a lot of work – so why not let Hnry sort it all for you?
Hnry is an award-winning accounting service designed specifically for sole traders. For just 1% +GST of your self-employed income, capped at $1,500 +GST a year, we’ll sort all your tax admin for you. Easy!
Save time, save money, and never think about tax again. Join Hnry today.
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