Contractor Tax Basics Guide
💼 Tax When You Work for Yourself
Going contracting or self-employed changes how tax works for you. There is no employer taking PAYE out of each pay, so you receive money gross and are responsible for your own tax, ACC and possibly GST. Many new contractors get caught out by a big bill at year end because they did not set money aside. This guide explains the basics, income tax, GST, provisional tax, expenses and ACC, so you can manage your tax rather than be surprised by it. It covers the concepts, not the specific rates.
Paid Gross Means You Owe Tax Later
The biggest mindset shift is that the money landing in your account is before tax. An employee's pay is after PAYE; a contractor's invoice payment is not. That gross amount includes the tax, ACC and possibly GST you will owe later. Treating all of it as yours to spend is the classic contractor mistake.
What You Are Responsible For:
- Income tax on your profit, paid via provisional tax
- GST if your turnover passes the registration threshold
- ACC levies, invoiced separately based on your income and work type
- Setting money aside, because nothing is deducted at source
📝 GST, Provisional Tax and Expenses
GST: Register Above the Threshold
If your turnover from your work passes the GST registration threshold in a 12-month period, you must register for GST. You then add GST to your invoices, pass that to Inland Revenue, and can claim back the GST on your business expenses. For clients who are themselves GST-registered, charging GST makes no real difference to them. Below the threshold you can register voluntarily, but it adds paperwork.
GST in Brief:
- Compulsory once turnover passes the registration threshold
- You charge GST, pass it on, and claim GST back on expenses
- GST you collect is not your money; set it aside
Provisional Tax and Expenses
You pay income tax on your profit, which is income minus allowable business expenses, so keeping good records of legitimate expenses reduces your tax. Once your tax bill passes a threshold you pay provisional tax in instalments during the year. Claiming genuine expenses (tools, vehicle business use, home office, professional fees) lowers your taxable profit, but private spending is not deductible.
Good record-keeping is a contractor's best friend. Keep invoices, receipts and a logbook for vehicle use throughout the year, not in a panic at tax time. Accounting software or a simple spreadsheet makes provisional tax and GST far less stressful.
ACC and Setting Money Aside
ACC invoices contractors separately for levies based on your income and occupation, and the bill can be a shock if not budgeted for. The single most important habit is to set aside a percentage of every payment, often around a third, into a separate account for tax, GST and ACC. Then the bills are money you already have, not a crisis.
🤔 Common Contractor Tax Mistakes
Mistake 1: "The money in my account is all mine"
Reality: It is gross. Tax, ACC and possibly GST come out of it later. Spending it all leads to a bill you cannot pay.
Mistake 2: "I do not need to think about GST"
Reality: Once turnover passes the threshold, GST registration is compulsory. Ignoring it means trouble; the GST you should have charged still has to be accounted for.
Mistake 3: "I can pay all my tax at year end"
Reality: Once you are a provisional taxpayer, tax is due in instalments. Leaving it to the end can trigger use of money interest.
Mistake 4: "I can claim everything as an expense"
Reality: Only genuine business expenses are deductible. Private costs, and the private share of mixed costs, are not.
Mistake 5: "ACC does not apply to me"
Reality: Contractors pay ACC levies, invoiced separately. The bill can be sizeable, so budget for it.
Mistake 6: "I will sort the records out at tax time"
Reality: Scrambling for a year of receipts is stressful and error-prone. Recording as you go saves money and headaches.
Open a separate account and move a set percentage of every payment into it for tax, GST and ACC. Do this from your first invoice. It turns three potentially nasty bills into money you have already put aside, and is the difference between contracting smoothly and lurching from bill to bill.
🎯 Test Your Knowledge
Quiz on Contractor Tax Basics
Frequently Asked Questions
How is contractor income taxed in New Zealand?
Contractors pay income tax on their net profit, often through schedular payments with withholding tax, and may also manage provisional tax and GST.
Do contractors have to pay GST?
If your turnover exceeds the $60,000 registration threshold over 12 months you must register for and charge GST. Below that it is voluntary.
What expenses can contractors claim?
Genuine business costs such as tools, work vehicle running costs, a home-office portion, software and professional fees, with records kept.
Do contractors pay ACC?
Yes. The self-employed pay ACC levies based on their liable income and business classification, invoiced after filing.
Related guides
- Tax for Contractors in New Zealand, a related guide in the same area.
Related tools and guides
- Tax reserve per invoice: the percentage to set aside from every invoice.
- Contract rate to salary calculator: what your rate is worth as a salary.
- IR330C rate chooser: the withholding rate to put on the form.