For a lot of contractors and freelancers, the end of the financial year is the culmination of a year’s worth of anxiety and discomfort.
To help you navigate the end of financial year, Hnry’s expert accounting team have put together this handy guide to help you understand what the IRD expects of you.
Calculating your expenses
A good starting point is to review all of your expenses for the year. If you don’t already have all your receipts collated somewhere safe, you may need to hunt down the receipts and download statements from your online providers - as you’ll need to have these handy for IRD if they need them.
You’ll find that some of your business expenses won’t be 100% claimable for tax relief. IRD have strict rules around things like Entertainment expenses, Home Office expenses, and Vehicle expenses. It really pays to know the rules about what types of expenses are only partially claimable, so as to stay on the right side of IRD.
Asset Depreciation
If you have any equipment purchases of over $500 in value, these will need to be depreciated as assets. This means that you’ll claim a portion of the value of the expense each year, over a set number of years. The exact portion, and the number of years to depreciate over, all depends on the type of equipment you’ve purchased. Laptops are depreciated differently from vehicles for instance. To work out the right method to use for each different type of asset, you’ll need to consult the IRD’s Depreciation Rate Finder.
Getting the total of your income
Next, you’ll need to gather together all the information about the income you’ve earned within this financial year. All your sources of income, from PAYE/Salary work, to contracting work, through to bank interest and dividends are all considered to be taxable income by IRD.
You’ll also need to gather together the totals of any income tax you might already have paid on this income. You may have had an employer deduct Withholding Tax before paying you, you may have had a bank or financial institution deduct Resident Withholding Tax from any interest earned, and you may have been making Provisional Tax payments throughout the year.
IRD may already have some of this information already lodged in their systems; however, it pays to know these details yourself - just in case their systems aren’t up to date. You wouldn’t want to end up overpaying your tax!
Lodging your Income Tax return with IRD
Once you’ve got all the relevant information together, you’ll need to set aside some time to actually file your IR3 individual tax return with IRD. This needs to be done before the 7th of July each year, to ensure you don’t end up being subject to penalties and fines.
Luckily, this can mostly all be done online these days - and the IRD website will step you through each of the 40 sections of the IR3 form in turn.
You’ll need to enter in all your income to date (subtracting off any income that has already been lodged with IRD by any of your employers) and also provide a breakdown of the claimable amounts of all your expenses, against each of IRD’s specific categories. IRD won’t calculate the actual claimable amount of your expenses for you (you’ll need to do that beforehand) however they will checkthat you’ve done it correctly.
Tax Owing
Once your IR3 form has been lodged with IRD, they’ll provide you with an indicative total of the amount of income tax you’ll need to pay - effectively this will be the income tax owing on the the total of all your income, less claimable expenses and less any tax already paid. It’s worth noting that until IRD have manually validated your tax return, this number may be subject to change.
Provisional Tax
If your income tax owing is greater than $5,000 (this number was updated on 24 March 2020 in response to COVID-19), you will be required to make Provisional Tax payments in the following financial year. IRD will require you to make 3 tax payments during the year, based on your income from the prior year - this may mean that you have to pay tax, even if you’re not earning as much as the previous year!
N.B. If you have a rental property, you’ll also need to fill out an IR3R form in addition to an IR3 form, with a detailed breakdown of the income and expenditure for your rental property.
Getting professional support
For a lot of contractors and freelancers, the idea of having to deal with all of this themselves can seem daunting and risky. That’s why getting professional support can be a great way of taking care of the problem.
In the past, getting the services of an accountant or bookkeeper could solve part of the hassle, however many people found that the amount of manual effort still required usually made this a costly and unfulfilling experience.
These days however, revolutionary services like Hnry take care of all of the hassle, by calculating, paying and filing your taxes for you automatically, so you no longer need to think about your financial admin.
Hnry saves thousands of contractors time, money and stress by collating all the relevant information, calculating claimable expense portions and depreciation, and filing all required tax returns with no fuss.
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