What is a contractor
Being a contractor means you:
- are self-employed
- choose what work you do
- choose how, and sometimes where, to do your work
- are responsible for paying your tax.
There may be similarities with being in a salaried job – for example, you may carry out the same tasks that a salaried person does. But there are differences, which is what you should focus on when deciding if being a contractor is the right choice for you.
Ask yourself these questions before you decide.
Why become a contractor?
You may want to be a contractor because:
- you want to use your skills to earn more than you could in a salaried job
- you don’t have an opportunity to get a permanent salaried work – for example, after being made redundant.
Will it suit my personality?
Contracting suits people who can adapt quickly and easily to new situations. Consider that:
- contracts can be as short as a few weeks, or they can carry on for years
- it can be stressful to deal with gaps between contracts
- it can take time to get used to new work cultures and ways of working.
Consider the costs
Depending on what field you work in, there could be significant set-up costs in going contracting. For example, if you’re a cleaner you might need to spend a lot on equipment and products; if you’re a courier driver or truck driver, you might need to buy a vehicle.
Before spending large sums of money, think about:
- how long it will take you to pay off any loans you might need to take out
- what might happen if the company you’re contracting for loses work – how easily would you be able to find other contracting work, and if you could still pay off any debt.
Considering the costs will also help you price yourself. Seeing the whole picture will help you make good business decisions.
Company or sole trader
If you’re contracting, you can choose to be a sole trader or start a company. There are pros and cons to each option, so it’s important to understand what each would mean for you. Our Choose Business Structure tool can help you make the right choice.
Contractor or employee
When you're contracting, you should have a Contract for Services with your client. If you have an employment agreement, you're classed as an employee for the length of your agreement. You’ll have tax and ACC taken from your pay, and get paid sick leave and annual leave as a permanent employee would.
Consider getting professional advice before signing anything.
If you know anyone who’s contracting in your field, talk to them about what they like or don’t like about it.
Ask:
- what the negatives are
- if they earn as much as they thought they would
- if they find any financial aspects of contracting stressful
- if they’d recommend contracting to their child or a close friend.
Fractured income
If you’re contracting, you may have to get used to unplanned gaps between contracts. If your skills are in demand, you can take advantage of these gaps by turning them into holidays. However, it’s normal to want to have continuous work, and to get stressed when you don’t have it.
You should start looking for more work at least a month before your contract is due to end.
Sick leave
As a contractor, you don’t get paid sick leave. Budget for at least five days a year when you’re too sick to work and won’t get paid. Make sure you include this in your budget and when working out hourly rates.
Public holidays
As a contractor, you don’t get paid for public holidays, unless you work on those days. Make sure you include this in your budget and when working out hourly rates.
There are 11 national public holidays, and one anniversary day per province. You may be able to work those days, especially if you work from home, to make up set hours you have agreed with a client. But you won’t be paid above your hourly rate.
If you work at your client’s workplace, check if it’s open on public holidays.
KiwiSaver
As a contractor, you aren’t automatically enrolled in a KiwiSaver retirement savings scheme. You must set that up and pay into it yourself. Think about your retirement plans to work out how much to pay into your scheme.
Upfront costs
If you provide your own tools and equipment, estimating your costs can get complicated. For example, you’ll need to think about depreciation and tax-deductible expenses.
If you need to take out a loan or lease your equipment, get professional advice to ensure you understand your options and the implications, including for tax.
If you’re not expected to use your own equipment, you may not have many set-up costs.
If you’re going to work from home and need to set up and equip an office, you can claim back these costs as tax expenses.
Getting loans
If you’re a contractor, it can be harder to borrow money from a bank. You'll probably need to be able to show your bank or your lender:
- a history of continuous work
- a savings buffer, to show you can pay your mortgage even when you're in between contracts and not earning.
Hourly rates
It’s important you set a realistic hourly rate for your contract work. It needs to cover all your expenses and hidden costs. If you set your rate too high it could put off future clients, but setting it too low could leave you with not enough income.
How to work out your hourly rate
It’s easier to settle on your rate when you have been contracting for a while and have a better feel for the market. If you’re starting out, you can take the rate you would earn from a similar salaried job and add at least 20%.
For example, $50 per hour salaried rate + 20 per cent = $60 per hour contract rate
The increase covers things an employer would pay for if you had a salaried job, for example:
- annual leave
- sick leave
- public holidays
- ACC
- expenses such as business bank account and credit card charges, paper, printer ink, data plans and IT security costs.
There are other costs you should factor into your contract rate, including:
- new equipment
- any regular repayments or interest costs if you borrow money to buy new equipment
- an allowance for repairs and servicing
- fees and levies for things like annual licensing or registration
- insurance for assets and equipment
- public liability and professional indemnity insurance.
If you’re offered a contract rate, ask questions so you know exactly what you’re getting into – for example:
- What assumptions does the rate make about hours worked?
- Is the rate guaranteed? If not, what will affect it?
- Is work always available at that rate or can things like the weather, customer demand or the time of year affect your likely earnings?
- Can the other party change the environment you’ll be working in? If so, what implications does that have for your likely earnings?
Financial questions to ask yourself
After you’ve considered all the pros and cons about becoming a contractor, make sure you set yourself up correctly.
Ask yourself these questions:
- Should I work under my own name, as a sole trader, or as a company?
- What are the requirements around registering for GST?
- How should I finance my equipment?
- How much should I put aside for GST and income tax?
- How should I pay my tax?
- What records do I need to keep?
- What expenses can I claim?
If you need help working these things out, get professional advice from an accountant or financial adviser.
Common mistakes
Keep an eye out for these common mistakes when you consider becoming a contractor:
- Not putting aside enough money for tax and ACC.
- Leaving it too late to pay your tax.
- Not getting advice upfront.
- Not sending invoices on time.
- Not having your hourly rate high enough.
- Not making time for record keeping and administration.
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