Between 5 and 10% of Professionelle members describe
themselves as contractors. And of course, both of us in
Professionelle have worked as contractors as well. From experience,
we know that the thought of leaving conventional employment and
worrying about new tax implications was a bit
intimidating.
An Accountant's Perspective:
We asked Karen Tobeck, who is one
of our members, if she had any words of wisdom for people
considering the move from employee to self-employed contractor
status.
Karen kindly provided us with the advice below:
These days, a lot more people seem to be choosing to become
contractors. There are a number of potential attractions in this
work arrangement:
- A higher hourly pay rate
- More flexibility of working hours
- Claiming expenses against income
- Greater variety of work
Of course, for some, contracting is forced on them by changes in
their personal or employment situation; the stress of this can make
the administration requirements seem even more daunting. Whichever
way you look at it, you need to know what you are getting into, how
best to avoid the pitfalls and how readily you can access the
benefits.
Set-Up Options
Most contractors would use one of four legal vehicles to run
their new business: sole trader, partnership, limited liability
company or a trust. There are many reasons why you would choose one
particular structure over another and it is important that you get
advice on which one is best for you. Your advisor can help you with
this. Whichever one you choose you will need to raise invoices for
your work, possibly charge GST and keep business records.
Potential Pitfalls
Will the IRD accept your work situation as bona fide
contracting or not?
Employers and employees cannot just choose to switch to a
contracting arrangement. There are particular rules which the IRD,
and ultimately the courts, apply to decide whether your
relationship is one of a true contractor or a quasi-employee. An
example is the "control" rule. If the hirer can control when
holidays are taken, or when, where and what hours are worked, as
well as the work quality and the remuneration rate, then the
relationship will be considered to be quasi-employment.
You can read a fuller account of the rules
regarding bona fide contracting work situation here.
If you are forced by a current employer to move into a
contracting situation that you feel, after reading these rules, is
not bona fide, then try to ensure your employer understands the
issue. If the Department investigates you as the person claiming to
be an independent contractor, the onus of proof and the possibility
of penalties is as much on the hirer as it is on the
contractor.
Can you charge enough to cover new costs?
Remember that once you're self-employed, you no longer receive
holiday pay, statutory pay or sick pay. To recover this loss, you
need your charge-out rate to be at least 25% higher than your
hourly rate as an employee, just to be earning the same. For
example, if you currently earn $20 per hour as an employee ($40k
approx), then you need to charge at least $25 per hour to be on the
same money. My advice is that if you can't achieve more than 25%
you are better off as an employee.
Can you really extract the flexibility you
want?
A lot of contractors find they just work more hours than they
did as an employee and don't get the flexibility they expected. One
cause of this is that contractors' hours can become less
predictable.
The Good News
If you become a contractor you'll join the ranks of the
self-employed and this work status can give you advantages not open
to an employee.
Claiming Expenses
Once you are self employed, you can claim business-related
expenses against your income and hopefully reduce your tax
liability. This is the reason that IRD are so hot on making sure
that the person is in a true contract relationship, not just an
employee being called a contractor. Costs such as home office
expenses, vehicle expenses, mobile and home phones, office
equipment etc can be claimed and offset against income. You are
best to seek advice on what you can claim in your particular
situation.
Flexibility
When you set up your contract, that's the time to write in the
flexibility you want. Four day week? Leaving in time for the school
run? By setting expectations at the outset, you increase the
chances you won't lose this benefit of being a contractor.
Variety
Being able to work for more than one organisation can be a good
reason to work as a contractor. You can use your skills and get
exposure to different industries and people.
Handling the paperwork
If you don't want to learn how to prepare GST returns or balance
your books, then talk to your advisor. Most accountants today can
offer a service of doing this work for you at a reasonable
price.
Summary
Being a contractor can be very good as long as you are able to
get a good rate, flexible hours, and you understand the tax rules
for determining the true nature of a contracting relationship. I
would also recommend you have your lawyer review your contract to
ensure it is a viable contract.
The information in this article is general information only and
should not be relied on as advice by any person. For specific and
informed advice please see your advisor.
Acknowledgement
Karen Tobeck
Director
Monteck Group Limited
Chartered Accountants
Email: Karen@monteckgroup.co.nz
Web: www.monteckgroup.co.nz
Phone: 266 8763
Fax: 266 8761
Mobile: 0274 650005