Common Accounting Questions asked by IT Contractors

We’ve noticed lots of IT contractors return to New Zealand recently from overseas, contracting back to overseas businesses.* Here are some of the common questions we’ve had from them and the answers.

*This information also applies to IT professionals contracting to New Zealand firms.

It Contractor Accounting Questions

Should I operate under a company or as a sole-trader?

There is no requirement from the IRD to set up as a company prior to getting paid as a contractor for your IT services. Even though a company has a different tax rate to people who are on the top income tax rate, there are rules in place to prevent most high income contractors from using a company to avoid the top tax bracket (these are called the “attribution rules”).  

Usually the main reason for a business person to set up a company is to limit their personal financial liability in the event that their business gets into difficulty. An IT contractor has limited exposure to financial risks however it is important to have indemnity cover.

In the interest of having an easy life and to reduce costs with accountants and lawyers, it is often easier to trade using your own IRD number. This is called trading as a “sole trader”. Of course, every situation is different and it is important to get specific advice for you.

What is provisional tax and should I be paying it?

Provisional tax is a system for paying income tax in the year in which the income is earned. Your tax return for the year is then a “wash up” of the tax on the income you have earned for the year less the provisional tax you have paid during the year.

You will not normally be required to pay provisional tax until you have filed your first tax return as a contractor. It is good practice to keep about 30% of your income aside for your taxes in that first year.

If you earn over $200,000 per year however, you would do well to make some voluntary payments of provisional tax to the IRD. This is because the IRD charges interest back to the provisional tax dates in some situations. If you expect your income to be in this bracket please let us know.

It Contractor Accounting

What is withholding tax?

If you contract through a “Labour-hire Company” then you will have tax withheld by your employer and paid to the IRD on your behalf.

You have some choice as to the percentage of tax that is withheld. Some people may like to select a very low rate of withholding tax to allow you the use of the funds for longer. However, there will not be much timing benefit for this as once your first tax return is filed, you will be assessed for provisional tax to top up the withholding tax.

We recommend estimating your total tax for the year using the IRD’s “tax on annual income calculator” and then estimating the percentage of tax that applies on your income. If your withholding tax percentage is high enough, then you won’t get any big tax bills at the end of the financial year. 

Which expenses can I claim to reduce my tax bill?

Expenses that can be claimed are anything that directly relates to your work, such as software, equipment, training and professional development expenses.

If you have an area set aside in your home where you work then you will also be able to claim a portion of your home costs to offset some of your tax bill.

If your role is mostly at one site for an extended period of time then your travel from home to work is not deductible. However, if your work involves travel to different places then you will be able to make a deduction for your vehicle expenses.  There are many different ways to make a vehicle claim and the best way will depend on your specific situation.

What are ACC levies and how do they work?

As you will be aware, ACC provides personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.  

Whether you use a sole trader structure or you contract through a company you will be required to pay ACC levies. These levies will be calculated by the ACC and invoiced to you after you file your first income tax return. Your bill for ACC will be about $1,400 per year if you earn more than about $130,000pa.

There is an alternative option to agree a level of ACC cover in advance with the ACC and pay levies based on that agreed income levy. This scheme is called ACC CoverPlus Extra. Some people use CoverPlusExtra to reduce the amount that they pay the ACC, then use the savings to pay for private income protection insurance. If you would like some advice from an insurance broker let us know and we can pass you on some contact details.

What is the best way for me to prepare GST returns and income tax returns?

There is no prescribed method for completing the information required to file tax returns for the IRD. You can keep a record of your income and expenses on a spreadsheet or instead use software to save some time. Having chosen a career path in IT, you’ll love the functionality of using software like Xero just as much as we do.

We recommend keeping a separate bank account for contracting income and expenses (funds can be transferred in and out to your personal account). Doing this makes it easier to keep track of all business related transactions.