💰 Setting Aside Tax and Provisional Tax

How Much Tax Will You Pay?

Income Tax Rates (Same as PAYE):

Self-employed people pay same income tax rates as employees:

Key difference from employees: Your taxable income is revenue (what you earn) minus business expenses. Employees can't deduct work expenses against salary.

Calculating Your Likely Tax:

Example 1: Simple case

• Annual revenue: $60,000
• Business expenses: $10,000
• Taxable income: $50,000
• Tax calculation:
  • First $14,000 @ 10.5% = $1,470
  • Next $34,000 @ 17.5% = $5,950
  • Next $2,000 @ 30% = $600
  • Total tax: $8,020
• Effective tax rate: 16% of gross revenue (13.4% of taxable income)

Example 2: Higher earner

• Annual revenue: $120,000
• Business expenses: $20,000
• Taxable income: $100,000
• Tax calculation:
  • First $14,000 @ 10.5% = $1,470
  • Next $34,000 @ 17.5% = $5,950
  • Next $22,000 @ 30% = $6,600
  • Next $30,000 @ 33% = $9,900
  • Total tax: $23,920
• Effective tax rate: 20% of gross revenue (23.9% of taxable income)

Setting Aside Tax: The Critical Habit

Why It's Essential:

Unlike employees where tax automatically deducted, you receive full income. Temptation is spend it all - but tax bill inevitable. Setting aside tax immediately prevents:

• Cashflow crisis at tax payment time
• Having to borrow money to pay tax
• Penalties for late payment
• Stress and anxiety

How Much to Set Aside:

Conservative approach (recommended for beginners):

• Set aside 30-35% of gross income
• Covers income tax plus ACC levy
• Better to over-save than under-save
• Excess becomes bonus when tax lower than expected

Refined approach (once expenses known):

• Calculate typical expense percentage
• If expenses 20% of revenue, taxable income is 80%
• Apply tax rate to taxable income estimate
• Add 5% buffer for safety

Example: $60k revenue, $10k expenses

• Taxable income: $50k (83% of revenue)
• Tax on $50k: ~$8,000 (16% of revenue)
• ACC levy: ~$1,000 (varies by industry)
• Total to set aside: ~$9,000 (15% of revenue)
• Set aside: 20% to be safe (includes buffer)

The Separate Bank Account Method:

1. Open separate savings account labeled "Tax Account"
2. Every payment received, immediately transfer 30% to tax account
3. Never touch tax account except for tax payments
4. Automate if possible (automatic transfer)
5. Watch balance grow - this is your tax provision

What If Irregular Income?

Many self-employed have variable income month to month:

• Always set aside percentage: 30% of $1,000 is $300, 30% of $10,000 is $3,000
• Good months fund bad months: Tax still calculated on annual total
• Don't raid tax account in lean months: Discipline critical
• Build emergency fund separately: For genuine emergencies, not tax account

Provisional Tax Explained

What Provisional Tax Is:

Provisional tax is paying your income tax in instalments during the year, rather than one lump sum at year-end. Think of it as the self-employed equivalent of PAYE - spreading the tax burden across the year.

Who Pays Provisional Tax:

• Threshold: Previous year's residual income tax (RIT) exceeded $5,000
• Residual income tax: Income tax owing after credits (like PAYE already paid if you also have wage income)
• First year exception: Not required in first year of self-employment (no previous year to base on)

Example:

• Year 1: Earn $50k self-employed, pay tax at year-end
• Tax owing: $8,000 RIT
• Year 2: Because RIT exceeded $5,000, must pay provisional tax

Three Provisional Tax Methods:

1. Standard Method (Default):

• Pay 105% of last year's RIT in three instalments
• Instalments due 28 Aug, 15 Jan, 7 May
• Simple - IRD calculates for you
• Works well if income similar to last year
• 5% uplift accounts for typical income growth

Example:

• Last year's RIT: $10,000
• This year's provisional: $10,500 (105%)
• Three instalments: $3,500 each

2. Estimation Method:

• Estimate this year's income and calculate tax
• Useful if income significantly different from last year
• Can revise estimate during year if needed
• Risk: Under-estimate by more than $60,000 and 110% = penalty interest
• Safe harbor: If pay at least 90% of actual tax due, no penalty

3. Ratio Method (AIM):

• Accounting Income Method - based on actual income each period
• Requires accounting software that links to IRD
• Pay tax based on actual income earned each instalment period
• Most accurate but requires good record keeping

Provisional Tax Payment Dates:

• 28 August: First instalment (or alternative payment if no GST)
• 15 January: Second instalment
• 7 May: Third instalment
• 7 July: Terminal tax (final settlement)

Terminal Tax:

After filing annual return (IR3), IRD calculates actual tax owed:

• If provisional payments covered actual: Terminal tax is zero or refund
• If provisional too low: Owe terminal tax (top-up)
• If provisional too high: Receive refund
• Terminal tax becomes first provisional instalment for next year if over $5,000

Use of Money Interest (UOMI):

• IRD charges interest if underpay provisional tax significantly
• IRD pays interest if overpay provisional tax significantly
• Current rates published on ird.govt.nz
• Another reason to set aside tax - avoids underpayment interest

📊 GST Registration and Record Keeping

GST (Goods and Services Tax) Overview

What GST Is:

GST is 15% tax added to most goods and services in NZ. As GST-registered business:

• You charge GST: Add 15% to your prices, collect from customers
• You pay GST: Included in prices you pay for business expenses
• You claim back GST: Deduct GST paid on expenses from GST collected
• You pay difference: Remit net GST to IRD (usually every 1-2 months)

GST Registration Threshold:

• Mandatory registration: Annual turnover exceeds $60,000
• Turnover = gross sales: Before expenses, before GST
• Rolling 12 months: Past 12 months or expected next 12 months
• Must register: Within 21 days of exceeding threshold

Voluntary Registration Under $60k:

Can register even if under threshold. Consider pros and cons:

Advantages:

• Claim back GST on business purchases (15% saving)
• Appears more professional/established
• Particularly beneficial if high startup costs (claim GST on equipment, setup)
• Good if customers are GST-registered (doesn't affect their cost)

Disadvantages:

• Must charge 15% more (can discourage retail customers)
• Additional compliance burden (GST returns every 1-2 months)
• Record keeping more complex
• Can't easily deregister once registered

General advice: If most customers are businesses (who claim GST back), register. If mostly retail customers (who feel 15% price increase), wait until mandatory.

How GST Works in Practice:

Example: GST-registered web designer

Income side:

• Quote $1,000 + GST for website
• Invoice customer: $1,000 + $150 GST = $1,150 total
• Collect $1,150 from customer
• Your income: $1,000 (the GST is not your money)
• GST collected: $150 (owe to IRD)

Expense side:

• Buy laptop for $1,500 incl GST
• GST portion: $195.65 ($1,500 ÷ 1.15 × 0.15)
• Net expense: $1,304.35
• GST paid: $195.65 (claim back from IRD)

GST return:

• GST collected: $150
• GST paid: $195.65
• Net position: -$45.65
• Result: IRD owes you $45.65 refund

GST Return Periods:

• Monthly: If annual turnover over $24M (most don't qualify)
• Two-monthly: Standard for most small businesses
• Six-monthly: Available if turnover under $500k

GST Accounting Methods:

Invoice basis (standard):

• Account for GST when invoice issued
• Even if not yet paid
• Most common method

Payments basis (optional):

• Account for GST when actually paid/received
• Better for cashflow
• Available if turnover under $2M

Record Keeping Requirements

Why Records Matter:

• Legal requirement: Must keep records for 7 years
• Tax return preparation: Can't file return without records
• IRD audits: Must substantiate income and expenses claimed
• Business insights: Know if profitable, where money goes
• Loan applications: Banks want business financials

What Records to Keep:

Income records:

• All invoices issued to customers
• Bank statements showing payments received
• Cash receipts if paid in cash
• Sales summaries

Expense records:

• All invoices and receipts for business expenses
• Bank statements showing payments made
• Mileage log if claiming vehicle expenses
• Home office calculation if claiming home expenses

GST records (if registered):

• Tax invoices for supplies made (must show GST number, amount, GST)
• Tax invoices for purchases (to claim GST back)
• GST return workings and submissions

Record Keeping Systems:

Option 1: Accounting Software (Recommended)

• Examples: Xero, MYOB, Hnry (Hnry also handles tax payments)
• Pros: Automatic calculations, bank feeds, GST returns, reports
• Cons: Monthly cost ($20-80/month depending on features)
• Best for: Anyone earning $30k+ annually

Option 2: Spreadsheet

• Tools: Excel, Google Sheets
• Pros: Free, flexible, simple for basic needs
• Cons: Manual entry, more prone to errors, time-consuming
• Best for: Very small operations or those with financial skill

Option 3: Accountant/Bookkeeper

• Pros: Expert handling, advice included, peace of mind
• Cons: Most expensive ($1,000-5,000+/year)
• Best for: Higher earners or those who hate admin

Hybrid approach: Use software yourself during year, accountant reviews and files annual return.

Organizing Receipts and Invoices:

• Go digital: Photo receipts with phone, store in cloud
• Apps: Many accounting apps have receipt scanning
• If physical: File in folders by month or category
• Never throw away: Must keep 7 years even if scanned
• Label clearly: Date, supplier, amount, purpose

Separating Business and Personal:

Bank accounts:

• Ideal: Separate business bank account
• Makes tracking much easier
• If can't separate: Mark business transactions clearly

Credit cards:

• Business card if possible
• Or use one personal card exclusively for business

Vehicle use:

• Keep logbook of business vs personal km
• Can't claim personal use
• IRD scrutinizes vehicle claims closely

Home office:

• Calculate business percentage of home expenses
• Based on floor area used exclusively for business
• Can claim portion of rent, power, internet

Common Deductible Expenses:

• Stock/materials for products sold
• Equipment and tools
• Office expenses (stationery, postage)
• Vehicle expenses (business portion only)
• Professional fees (accountant, lawyer)
• Insurance (business-related)
• Training and professional development
• Marketing and advertising
• Website and software subscriptions
• Home office expenses (calculated portion)
• Travel (business only, not commuting)

NOT Deductible:

• Personal living expenses
• Commuting from home to regular workplace
• Entertainment (generally not deductible in NZ)
• Fines and penalties
• Capital purchases (depreciated over time instead)

🏥 ACC, Scenario, and Checklist

ACC Levies for Self-Employed

What ACC Is:

Accident Compensation Corporation (ACC) provides no-fault injury cover for all New Zealanders. Employees have ACC levies deducted from pay. Self-employed must pay own ACC levies directly.

Types of ACC Cover:

1. CoverPlus (Default):

• Based on your industry classification and income
• Different levy rates for different industries (risk-based)
• Declare expected income for year
• Invoiced annually or in instalments

2. CoverPlus Extra (Optional):

• Choose your weekly compensation amount (up to 100% of income)
• CoverPlus only covers 80% of income by default
• Higher cover = higher levy
• Good for primary income earners with dependents

3. WorkPlace Cover (For Staff):

• If you employ people, need WorkPlace Cover for them
• Separate from your own self-employed cover

How Much ACC Costs:

Varies significantly by industry risk classification:

Note: Rates change annually and vary by specific classification.

Declaring ACC Income:

• ACC asks for income estimate at start of year
• Levies calculated on this estimate
• At year-end, ACC reconciles with actual income from IR3
• If actual income higher: Owe additional levy
• If actual income lower: Receive refund

ACC Payment Options:

• Annual payment (discount applied)
• Monthly instalments (more manageable cashflow)
• Direct debit or credit card

NZ Scenario: Sarah, Freelance Graphic Designer

Background:

• Sarah: 28, quit agency job to freelance
• Started: 1 July (tax year already underway)
• First 6 months target: $40,000 revenue
• Irregular income: Some months $8k, others $2k
• Working from home office

Sarah's Setup (Day One):

1. Registration:

• Already had IRD number from previous employment
• Called IRD to register as self-employed
• Provided business details and income estimate
• Decided against GST registration (under $60k threshold)

2. Banking:

• Opened separate business account (free business account)
• Set up sub-account within same bank labeled "Tax"
• Automatic transfer: 30% of deposits to tax account

3. Systems:

• Chose Hnry (accounting software specifically for contractors)
• Cost: $1 + 1% of income (so ~$4/month on $300 week)
• Hnry calculates tax, makes payments to IRD automatically
• Tracks expenses, generates tax invoices

4. ACC:

• Registered for CoverPlus
• Classification: Graphic designer
• Estimated income: $40,000 for 6 months (pro-rated year)
• Levy: ~$208 for 6 months
• Chose monthly instalments

Sarah's First Six Months:

Income received:

• July: $8,200
• August: $4,500
• September: $7,800
• October: $3,200
• November: $9,500
• December: $8,100
• Total: $41,300

Expenses tracked:

• Laptop and monitor: $2,400 (depreciated over 3 years = $800 this year)
• Software subscriptions: $780
• Internet (business portion 40%): $240
• Home office expenses (10% of rent/power): $1,200
• Professional development course: $600
• Accounting software: $60
• Total deductible: $3,680

Tax calculation:

• Taxable income: $41,300 - $3,680 = $37,620
• Tax owing:
  • First $14,000 @ 10.5% = $1,470
  • Next $23,620 @ 17.5% = $4,134
  • Total: $5,604

Sarah's tax account:

• 30% auto-transferred: $12,390
• Tax actually owing: $5,604
• ACC paid: $208
• Total obligations: $5,812
• Surplus in tax account: $6,578

Sarah's Learnings:

What worked:

• Separate bank account prevented spending tax money
• 30% set-aside was overly conservative but gave peace of mind
• Hnry automated most tax admin - worth the 1% fee
• Good records made year-end easy
• Surplus tax savings became emergency fund bonus

Challenges:

• Irregular income stressful initially
• Tempted to raid tax account in lean months (resisted)
• Felt like paying more tax than employee (but also claiming expenses)
• ACC invoice surprise (forgot to budget for it)

Year Two Changes:

• Refined tax set-aside to 25% (learned expenses ~10% of revenue)
• Total year two income: $72,000 (exceeded GST threshold)
• Registered for GST from 1 April (start of tax year)
• Started paying provisional tax (previous year RIT was $9,800)
• Hired accountant to review and file IR3 ($800)

Self-Employed Tax Checklist

Immediate Actions (Before First Dollar Earned):

• ☐ Obtain IRD number if don't have one
• ☐ Register with IRD as self-employed
• ☐ Determine if must register for GST (over $60k expected)
• ☐ Register for ACC CoverPlus
• ☐ Open separate business bank account
• ☐ Create tax savings sub-account
• ☐ Choose record-keeping system (software or spreadsheet)
• ☐ Understand your tax year (1 April - 31 March)

Ongoing (Every Time Income Received):

• ☐ Issue invoice with all required details
• ☐ Record income in accounting system
• ☐ Transfer 30% to tax savings account
• ☐ File invoice copy safely

Ongoing (Every Time Expense Paid):

• ☐ Keep receipt/invoice
• ☐ Record expense in accounting system
• ☐ Photo or scan receipt for digital backup
• ☐ File receipt (digital or physical)

Monthly Tasks:

• ☐ Reconcile bank accounts
• ☐ Review profit/loss summary
• ☐ Check tax savings account balance
• ☐ Pay ACC instalment if monthly
• ☐ File GST return if applicable (every 1-2 months)

Annual Tasks:

• ☐ Prepare annual accounts (by 31 March year-end)
• ☐ Calculate total income and expenses
• ☐ Complete IR3 tax return (due 7 July, or later if tax agent)
• ☐ Pay terminal tax if owing
• ☐ Pay ACC annual invoice (or set up instalments)
• ☐ Reconcile ACC income (actual vs estimated)
• ☐ Update provisional tax amounts for coming year
• ☐ Review and adjust tax set-aside percentage

Important Dates to Remember:

• 31 March: Tax year ends
• 7 July: Tax return (IR3) and terminal tax due (if no tax agent)
• 28 August: First provisional tax instalment
• 15 January: Second provisional tax instalment
• 7 May: Third provisional tax instalment
• GST return dates: Vary based on period (monthly, 2-monthly, 6-monthly)

When to Seek Professional Help:

• ☐ Income exceeds $50k annually (accountant review worthwhile)
• ☐ Uncertain about expense deductibility
• ☐ Considering GST registration decision
• ☐ Facing IRD audit or investigation
• ☐ Contemplating company structure
• ☐ Complex situation (multiple income sources, investments, etc.)
• ☐ Simply overwhelmed by tax requirements

Common Mistakes to Avoid:

• ☐ Not setting aside tax money
• ☐ Mixing business and personal finances
• ☐ Poor record keeping
• ☐ Missing registration deadlines
• ☐ Claiming personal expenses as business
• ☐ Underestimating provisional tax
• ☐ Ignoring ACC obligations
• ☐ Not keeping records for 7 years

Final insight: Self-employed tax in NZ: you're responsible for all tax obligations. Register immediately with IRD, get IRD number, determine GST need (mandatory over $60k/year). Tax rates same as PAYE (10.5-39%) but calculated on revenue minus expenses. Set aside 25-35% of gross income in separate account - critical habit preventing cashflow crisis. Provisional tax required if previous year's RIT exceeded $5,000 - pay in three instalments (Aug, Jan, May) using standard, estimation, or ratio method. GST registration mandatory over $60k, voluntary below - charge 15% on sales, claim back on expenses, remit difference. Record keeping essential: keep all income/expense records 7 years, use accounting software or spreadsheet, separate business/personal finances. Common deductibles: equipment, materials, professional fees, vehicle (business portion), home office (calculated portion). ACC levies vary by industry risk - graphic designer ~$312/year on $60k, builder ~$2,100, roofer ~$4,800. Sarah scenario: freelance designer earning $41k in 6 months, set aside 30%, used Hnry software, had surplus at year-end, registered GST year two when exceeded threshold. Self-employed checklist: immediate setup, ongoing income/expense tracking, monthly reconciliation, annual return filing. Professional help worthwhile over $50k income. Getting tax right from day one prevents penalties, stress, and financial surprises.