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What to consider before you start contracting

There are many benefits to working as a contractor — it can pay better than doing a similar salaried job and be more flexible. But there are hidden costs to think about, too. Here’s where you’ll find tips, information and common mistakes to help you decide if going contracting is for you.

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, as a contractor you are in business for yourself. The differences, like gaps between contracts that you can’t control, may mean that contracting is not for you. Ask yourself the following questions before you decide:

Why become a contractor?

Some people choose to become contractors. They want to use their skills, to earn more than they could in a salaried job. Others do it because they find themselves out of permanent salaried work, for example, after being made redundant.

Will it suit my personality?

Contracts can be as short as a few weeks or they can carry on for some time, sometimes for years. You’ll need to handle the stress that may come with any gaps between contracts — short and long, expected and unexpected.

It can take time to get used to new work cultures and ways of working. Contracting suits people who can adapt quickly and easily to new situations.

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 significant amount 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. Also consider what might happen if the company you’re contracting for loses work – will that mean you’ll lose your contract? Would you be able to easily find other contracting work? Would you be able to continue paying down any debt you owe on your equipment?

Business structure overview

Sole trader or company?

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 pays to understand what each would mean for you. Our Choose Business Structure tool can help you make the right choice.

Becoming a sole trader

Starting a company

Choose Business Structure tool(external link)

Contractor versus employee

When you're contracting, you should have a "Contract for Services" with your client. If you have an employment agreement — even if you're only with the organisation short term — 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.

What to watch out for in contracts

Hiring contractors vs employees

For more information on the differences between your rights and responsibilities as an employee or a contractor, Employment New Zealand outline the differences in more detail.

Contractor versus employee(external link) — Employment New Zealand

Hidden costs

It’s a common mistake to assume what you’ll earn in a year simply by looking at your contract rate, for example, $75 per hour X 8 hours a day X 5 days a week X 52 weeks a year = annual income of $156,000. There are several costs to include first, for example, covering your own sick leave and ACC.

Fractured income

If you’re contracting, you may have to get used to unplanned gaps between the end of one contract and the start of another. 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 get stressed when you don’t have it.

Keep alert when working for any clues to what will happen with your contract. You should start looking for more work at least a month before your contract is due to end.

To give yourself peace of mind, save a buffer of up to three months' income in case of unplanned breaks between contracts.

To give yourself peace of mind, save a buffer of up to three months' income in case of unplanned breaks between contracts.

Sick leave

As a contractor, you don’t get paid sick leave. It’s a good idea to 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 that you don’t work. Make sure you include this in your budget and when working out hourly rates.

There are 11 national public holidays, plus one anniversary day per province, for example, Auckland Anniversary Day. 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, for example, 40 hours a week. 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, for example, between Christmas and New Year.


As a contractor, you are not automatically enrolled in a KiwiSaver retirement savings scheme. You must set that up and pay into it yourself.

It’s a good idea to think about your retirement plans, for example, how much you plan to save for it, to work out how much to pay into your scheme.

Retirement planner(external link) — Sorted

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 you should seek professional advice to ensure you understand your options and the implications, including for tax. 

If you are not expected to use your own equipment, you may not have many set-up costs.

If you are going to work from home and need to set up and equip an office, you can claim back these costs as tax expenses. Check out our visual guide to claiming expenses when you work from home.

Visual guide: Claiming expenses

Getting professional advice

Getting loans

It can be harder to borrow money from a bank for things like a mortgage or a car, if you're a contractor. You'll probably need to be able to show your bank or your lender:

  • a history of continuous work, for example, 2 years
  • a savings buffer, to show you can pay your mortgage even when you're in between contracts and not earning.
Case study

Case study

Minding the gaps

“When I started contracting I was surprised at the end of the year that I hadn’t earned more,” says long-time IT contractor Stephen. “I’d negotiated a pretty good rate and lined up a second contract to start three weeks after my first one ended, so I thought ‘Sweet, I’ll take a holiday’.”

But a delay starting the second contract turned a three-week gap into two months.

“It was quite stressful when I look back on it because I had to take a hard look at my finances.”

He now saves some of his monthly income for a buffer in case of future contract gaps. “I also put aside time towards the end of contracts for finding work — not just talking to agencies, but doing some networking, even if it’s talking to mates in the industry, it all helps.”

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, for example, sick leave and public holidays. If you set your rate too high it could put off future clients. Setting it too low could leave you out of pocket.

Managing your finances

When you start contracting, it can be a good idea to discount your hourly rate while you build your reputation.

When you start contracting, it can be a good idea to discount your hourly rate while you build your reputation.

You may also need to agree to a slightly lower rate for longer contracts, eg 12 months.

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, a good method is to take the rate you would earn from a similar salaried job and add at least 20 per cent, 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, for example a rate per day, or to cover a route or territory ask questions so you know exactly what you’re getting into. Such as:

  • what assumptions does the rate make about hours worked?
  • is the rate guaranteed? If not what will affect it – the specifics of a site or route, your skill and speed?
  • 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 site, or route or territory you’ll be working, and if so, what implications does that have for your likely earnings?

Things to think about before you start

You have thought through the pros and cons of becoming a contractor and want to get started. You’ll want to make sure you set yourself up correctly. Questions to think about might include:

  • 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, consider talking to an accountant or financial adviser for professional advice.

Business structure overview


Keeping tax records

Claiming expenses

Common mistakes

Common mistakes
  • Not putting aside enough money for tax and ACC — you should save this from every invoice that’s paid to you.
  • Leaving it too late to pay your tax — whether it’s GST or income tax, not paying on time could cost you more in penalties.
  • Not getting advice up front — getting the right advice at the right time is crucial for contractors. Experts can help you to set yourself up so you don’t keep making the same mistakes, for example, saving the right amount for provisional tax.
  • Not sending invoices on time — if you don’t send an invoice, you won’t get paid. Send it as soon as you can, for example, at the end of your working week if you’re invoicing weekly.
  • Not having your hourly rate high enough — it should cover all your expenses, your cost of living and things paid for by an employer in a salaried job.
  • Not making time for record keeping and administration — if your records are a mess it’s easy to miss key dates and lose documents Inland Revenue may need.
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