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.
Being a contractor means you:
There may be similarities with being in a salaried job, eg 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:
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, eg after being made redundant.
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.
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?
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.
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:
It’s a common mistake to assume what you’ll earn in a year simply by looking at your contract rate, eg $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, eg covering your own sick leave and ACC.
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.
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.
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 10 national public holidays, plus one anniversary day per province, eg 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, eg 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, eg 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, eg how much you plan to save for it, to work out how much to pay into your scheme.
Retirement planner(external link) — Sorted
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.
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:
“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.”
It’s important you set a realistic hourly rate for your contract work. It needs to cover all your expenses and hidden costs, eg 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.
You may also need to agree to a slightly lower rate for longer contracts, eg 12 months.
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, eg:
The increase covers things an employer would pay for if you had a salaried job, eg:
There are other costs you should factor into your contract rate, including:
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:
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:
If you need help working these things out, consider talking to an accountant or financial adviser for professional advice.