Updated: Oct 5, 2021
Struggling with your books and tax returns is no fun especially when you could be out there making money doing what you're good at. Accounting and tax are our trade - that's what we're good at and being a small business, we also know and understand other small businesses and contractors.
Do I register for GST?
If your turnover is more than $60k in a 12 month rolling period then you need to register for GST.
Consider other sources of income
Airbnb versus normal rental.
Salary and wages etc.
- Salary and wages are not subject to GST so these can be excluded from the $60k
The transactions are based on when they hit your bank account.
The transactions are based on the date of the invoice.
- The majority of our clients are 2-6 monthly, and this really depends on your personal preference.
Should I be a company or not?
There is no right or wrong answer about whether to trade as a company. In fact, to be perfectly honest it almost comes down to a personal choice for most.
What I find helpful in making the choice is to ask yourself what you’ll be doing in 2 – 5 years’ time. You can usually fit yourself into one of the categories below:
Undecideds - “This is a one-year contract, then I’m not sure what I’ll do."
There is nothing wrong with being in this category but if you are I’d probably suggest that you operate as a sole trader rather than a company.
While you’re “dabbling your toes” in the contracting world, you won’t really need the benefits that a company can offer you, and if you decide that it’s not for you, then it’s a bit more difficult to close it down.
Career contractors - “Once this contract finishes I’ll get another contract.” This is probably the category that is the most difficult to decide or give a recommendation on, and really comes down to how you want to run things.
In April 2017 The Government introduced new laws around having withholding tax deducted from contractors working through a recruitment firm. The law applies to you even if you operate as a company, which was a waste of time for many of our contractor companies. There is no point deducting withholding tax from a company when the company won’t end up paying tax anyway as all the profits get passed through to the shareholders.
- If you’re a contractor getting withholding tax deducted, then you might be leaning more towards running as a sole trader. If you do some quick calculations to work out what tax rate you should have deducted, it will almost feel like being an employee. You should be able to avoid having provisional taxes due and only end up with a minor end of year tax square up bill.
- We have some clients who like to trade as a company and set themselves up as actual employees, paying themselves PAYE salaries. This can be a good way of keeping things simple from a personal viewpoint (you’re just an employee), so you can concentrate on running the company
Businesses - “I’m going to build this into a business and look at employing people and leasing an office.” This is really the only category where I would strongly recommend that you operate under a company structure.
- Limited Liability.
Although banks, landlords and a lot of suppliers try and get around the limited liability of the company it does still offer protection.
I quite often refer to companies as “vehicles” to trade out of. A common scenario would be where you might have two contractors (whether it’s a personal relationship as well or just a business relationship) both trading out of the same company.
Later, a new person may come into the equation and could be added as a shareholder, and there can be different percentages. For example, 40 / 30 / 30.
People can exit the company, passing the reins over to the remaining shareholders.
I talk a lot with clients about the need to keep business and personal lives and transactions separated. Sometimes its just easier to do this when you have a company.
Xero contractor withholding tax
It is very common for clients to miscalculate their GST when they are having withholding tax deducted from their income. Watch this recording to go through things in more detail and make sure you get things correct.
General accounting tips
Motor Vehicle & Travel
There is a specific tax law that states that travel from home to work is not allowed as a tax deduction. The key to this is whether your home is classed as an actual work location.
If you’re say an IT consultant working in town and each day you only travel from home to work, then it’s unlikely you will be able to claim any travel or vehicle costs. In this situation you’d only be able to claim an expense for trips that aren’t directly from home to work. For example, the days you go to see your accountant, or trips to the airport for business flights.
If you have multiple work locations and client sites that you go to, then your home becomes another workplace, meaning that you can claim motor vehicle and travel costs. You can claim either a percentage of the total vehicle costs, or claim a mileage reimbursement based on the actual business kms travelled during the year:
Percentage of Vehicle Costs: To claim a percentage of the vehicle costs, you’ll need to keep a logbook for 3 months to establish the percentage of business usage. You’ll also need to keep a record of the actual vehicle costs (fuel, repairs etc.), and it’s a good idea to pay these out of your business bank account.
Mileage reimbursement: It’s usually best to use this method if you don’t use the vehicle that much for work. You’ll need to keep a record of the kms travelled so that we can make the claim at the end of the year.
You can claim a percentage of your home expenses based on the floor area used for business versus the total floor area of the home. The key here is that the area has to be exclusively available for business. So, just because you sit on the couch with your laptop doing work at nights, doesn’t mean you can claim the lounge as a home office.
In many cases this is easy as people have separate rooms or areas like the spare room that they use for the home office. In many situations, particularly with apartment living it is hard to determine. Usually though, clients do have an actual desk that they work from. We would draw an imaginary line around the desk area, saying that because the desk is there you can’t use the space privately, and we’d claim based on that.
Since COVID-19, many clients have gone from using their home office just at nights to do their bookwork etc. to actually using it during the day while they’re working from home. This doesn’t really change the amount you can claim, as it is based on floor area, not hours used. If this situation applies to you, then you would be able to claim a few expenses as office supplies, for example tea and coffee, just like any normal commercial office would.
We have a home office spreadsheet you can download and use. Download.
We’ve got a few golden rules that if followed, will help steer you in the right direction:
The Boss Rule.
You should always behave as if your boss is watching you. Being your own boss is a big advantage of being self-employed, but it can also be a potential risk. Would your boss buy you a new set of mag wheels for your work vehicle? Would he buy you a $4,000 cell phone? The IRD won’t care if you’ve got a $1,200 cell phone or a $4,000 one, it makes no difference to them, but I’m pretty sure your boss would have something to say about it! If you’re about to do something, run it past your imaginary boss, and if you think he (or she) would be happy with it then that’s a good indication that it would be deductible for tax AND it is a good idea in the first place.
Will It Help Me Earn Money?
If you can draw a line between spending the money and it helping you earn money, that is a good indication about whether it is deductible.
Entertainment, Travel, Food.
If you’re entertaining clients or work colleagues, then you should be able to claim entertainment expenses. As a rule of thumb, if the expense includes food or beverages then it is subject to entertainment tax. This means that we’ll make an adjustment to only claim half of it at the end of the year.
Note, you’re only allowed to claim expenses when you are actually “entertaining” people in relation to work. Examples of these would be coffee meetings, or business lunch or dinner and drink. It doesn’t include when you grab something to eat by yourself at lunch time.
When you’re travelling out of town on business things change. You’re allowed to fully claim food as a deduction if it is while out of town on business.
Apply the “boss rule” to this. Yes, your boss would pay for coffees at a business meeting, and he’d pay for your food while out of town but not for your lunch each day at work.
Separate Business & Personal Life
Having a separate business and personal bank account and separate EFTPOS cards for each is an important part of being in business for several reasons. The bank account is the main core of your accounting system and its important that its used to capture all of the business transactions.
If you think a transaction will be deductible, you can use the business card at the time to capture the transaction. For example, if you are at the supermarket and you get a lightbulb and some paper or pens for the office. Put it through as a separate transaction from your groceries.
Having your personal transactions in a separate account reduces the amount of work you need to do in reconciling the transactions in your accounting system and keeps everything much tidier.
If you’re ever audited by IRD and you can demonstrate that you keep business and personal transactions separate, they’ll be a lot happier with you – and that’s what we want!
Its also easier to budget, because if you have a bunch of personal transactions mixed in with the business expenses, it can be harder to see how much you’ve spent.
You may not have considered the insurance implications for being in business.
We would advise you to have a think about your insurances, and potentially talk to your insurance broker about it:
Motor Vehicle. Even if the IRD say that travelling to work while self-employed may not be allowed as a business expense, your insurance company will treat it as business related. That could mean that you’re not covered if you have accident. It could be worthwhile discussing this with your insurer – although they’re likely to want to charge a higher premium.
Professional Indemnity and Public liability insurance. What type of work do you do, and is there much of a risk if something goes wrong? Once again this could be worthwhile discussing with a business insurance broker.
Homeowners insurance. Will you be covered by your home insurance if something happens in your office at home? Will your work equipment be covered, for example your cellphone and laptop?
Tax: sole trader or company?
Get the right amount of tax deducted.
Get no tax deducted or the minimum and then pay provisional tax.
Be aware of income attribution
0% tax code?
End of year salary
PAYE salary using Smart Payroll
Our office is based in Thorndon, and we also do a number of meetings at Park Kitchen in Miramar, as well as virtual sessions through Zoom, Teams or a phone call. Just click here if you wish to book a meeting with us.