Being a contractor – what it means and common pitfalls

Becoming a contractor takes courage – you’re usually replacing your safe and regular wage for the uncertainty contracting may bring. On the one hand, you can choose the type of work you perform, but on the other hand, if you don’t work, you don’t have income.

What is a contractor?
What does being a contractor mean?
Common pitfalls
Other things to remember

What is a contractor?

Self-employed people are sometimes referred to as contractors – they mean the same thing. As a contractor, you seek and perform services for clients.

Your income is generated by invoicing clients for your services. A contractor pays their own tax and ACC levies.

Contractors aren’t covered by most employment-related laws. This means they don’t get things like annual leave or sick leave, they can’t bring personal grievances, they have to pay their own tax, and general civil law determines most of their rights and responsibilities. Businesses don’t have to hold contractor records.

Not sure if you’re a contractor or employee? The IRD has very practical and clear guidelines.

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What does being a contractor mean?

  • You are self-employed
  • You can choose what work to do, when and where you do it (this  may depend on your industry
  • You are responsible for paying your own taxes, ACC levies, and putting money away in Kiwisaver
  • There is no sick or holiday pay
  • If you don’t work on a public holiday, you won’t be paid

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Common pitfalls

  • No putting aside enough for tax and ACC – transfer money regularly to a separate bank account and don’t touch it. We recommend allocating 20%-30% of your income to cover these taxes.
  • Not getting advice upfront – get the experts involved early.  Your accountant can help you decide the best structure to save you tax. A solicitor should look over any new contracts to reduce future liability.
  • Paying tax and GST late – this costs you money on penalties and interest.
  • Not sending your invoices on time – if you don’t send it, you don’t get paid!
  • Having your hourly rate set too low – this is easier for if you’ve previously been a paid employee in the industry. A good rule of thumb would be your old hourly rate + 20%. This may seem a lot at first, but remember that you need a markup to cover annual leave, sick leave, and public holidays. Our separate blog deals specifically with pricing.
  • Not making time for record-keeping and administration.

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Other things to remember

  • Even if you are a contractor, you should always have a contract of service with your client to set out the terms applying to your sevices. Make sure your contract is specific for your client – you may have different contracts under different circumstances.
  • You are expected to have your own equipment and tools needed for your job
  • Getting loans and mortgages – this can be harder than when you were an employee. You will need to demonstrate to the bank your business history and provide a forecast of your projected income and expenses for the next 12 months. For the first couple of years, this will be extremely difficult unless you have an ongoing contracts for the future.
  • Insurance and/or ACC – you need to consider the impact to you and your family if you cannot work due to either an accident or sickness.

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