I decided to write about my experiences becoming a freelance worker to help you with the same confusion and questions I had. Going from employment to being a freelancer or (sole trader) can be a little daunting. Personally, I had very little knowledge about accounting and taxes before I started, but these simple steps will help you take the plunge.
Call the IRD and tell them you are becoming a freelancer and working for yourself. You probably don’t need to do this but it gave me peace of mind. Ask if they have any advice. You probably won’t need to be GST registered as you will mostly likely make under the $60,000 threshold for the first 12 months of being a freelancer but crunch some numbers to check.
Do you have an accountant ? If so ask them for advice. Here is what I learnt from mine:
- You can claim expenses for a whole range of things like rent, internet, meetings, travel, phone, car - but you will need to justify it all. But there
are differing rules and regulations for all these claims, so it’s important to learn what/s applicable to you. For example when I work from home
I’m able to claim back 25% of my rent as my home office occupies 25% of the space. Conversely I’m able to claim 100% of my phone bill.
- Again, you only need to be GST registered if you're making over $60,000 which most people starting out won’t be so don’t worry about that yet.
Kiwisaver setup. When I was employed I was putting in 8% of my income but now I’m freelancing I put in the minimum deposit to get the full payout. So you have to contribute at least $1,042.86 a year to qualify for the maximum payment of $521.43 from the government. As my business grows I will go up to 8% again. You can do this with online banking.
Sign up to accounting software Xero. This is where I will keep track of my ingoings and outgoings (my invoices and expenses).
If you know an accountant who is helping you, invite them as an adviser. I really like Xero! But you may need to check first that your accountant is
happy to work with Xero. www.xero.com/nz
Put aside money for taxes, approx 25% of your incomings. Put them into a separate account so you don’t get it muddled up. I put aside 33% as it includes my savings, sick leave and holiday pay.
The end of the accounting year is Tuesday 31 March 2017 (so the standard year runs 1 April - 31 March). The due date of filing your income tax return is Tuesday 7 July 2016. You will need to complete an IR3 return.
You only pay taxes on your Net profit and any other income you have. To get your Net profit deduct your expenses from your Gross Sales. You would then pay taxes of 10.5% on the first $14,000 of it and 17.5% on the rest. Explained in detail here:
Provisional tax spreads the amount throughout the year. Which you will pay in three chunks on the 28 Aug, 15 Jan and 7 Feb. The final is 7th of May. Interest and penalties apply if you underpay or make late payments.
You will also need to pay ACC levies every year the same time you pay your taxes. The amount will depend on your earnings and your occupation. The default category they will put you in is also the most expensive! So if you're not in manufacturing make sure to change it by contacting ACC. www.acc.co.nz
Now you should have the setup you need. Working with an accountant is a huge help and I’m very fortunate to have my lovely sister working with me. She lives in Hong Kong but happy for remote enquires. You can look her up at lisagotliebenterprises.com