Contractor Tax Basics Guide - GST, Provisional Tax and Expenses

💼 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.

Master Framework: As a contractor you are paid gross, with no PAYE deducted (unless you are on schedular payments with withholding tax). You owe income tax on your profit (income minus allowable expenses) at the normal tax rates, and you pay it through provisional tax instalments during the year once your bill passes a threshold. If your turnover passes the GST registration threshold, you must register for GST, charge it and pass it on, claiming back GST on expenses. You also pay ACC levies, invoiced separately. The golden rule is to set aside a portion of every payment for tax, GST and ACC, because none of it is deducted for you.

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.

💡 Keep Records as You Go

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.

💡 The One Habit That Saves You

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

1. As a contractor, the money you are paid is:

Gross, before tax, ACC and possibly GST

After PAYE, like an employee

Tax-free

Net of everything

2. You must register for GST when:

Your turnover passes the registration threshold

You earn any income

You buy a laptop

Never

3. Contractors pay their income tax through:

Provisional tax instalments during the year

PAYE from an employer

A single payment whenever

GST

4. You pay income tax on:

Your profit (income minus allowable expenses)

Your gross income with no deductions

Only GST

Your bank balance

5. GST you collect from clients is:

Not your money; you pass it to Inland Revenue

Yours to keep

Tax-free profit

A bonus

6. Which can you claim as an expense?

Genuine business costs like tools or business vehicle use

Your weekly groceries

A private holiday

Your home rent in full

7. Contractors pay ACC levies:

Invoiced separately, based on income and occupation

Never

Through PAYE

Only if they want cover

8. The most important contractor habit is to:

Set aside a percentage of every payment for tax, GST and ACC

Spend everything and borrow later

Ignore record-keeping

Never register for GST

9. Leaving all your tax to year end can:

Trigger use of money interest once you are provisional

Save money

Avoid GST

Increase your refund

10. Good record-keeping should happen:

Throughout the year, as you go

Only at tax time

Never

Once every five years

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