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Many contractors overestimate what they can earn in a year. Make sure your contracting rate covers things an employer would normally pay for, eg holidays and time off sick. Here’s how to budget for the ebbs and flows — and the expenses — that come when you work for yourself.
Broken 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. Ideally put aside three months’ income in case you don’t have continuous work.
Sick days: It’s a good idea to factor in not being able to work five days a year when you’re too sick to work. Include this in your hourly rate.
Public holidays: When you’re a contractor you may not be able to — or want to — work on public holidays. In New Zealand we have 10 national holidays, eg Easter and Labour Day, and one holiday per province, eg Hawke’s Bay anniversary day. Budget for these as well.
Annual leave: Some contractors budget to use gaps between contracts to take a holiday. If you don’t save a buffer you may find you can’t relax or go away between jobs.
Expenses: You may need to buy or replace equipment like a computer, tools or safety gear. You can claim these back when you do your taxes.
Insurance: Ask yourself what could go wrong at work, and think about types of insurance that might cover you for these risks. You might also want to protect your assets, vehicle or buildings against loss or damage. Liability insurance is useful if you do work for other organisations — it covers you if that organisation sues you or an employee for damaging their property or reputation.
KiwiSaver: It’s a good idea to plan for your retirement. As a contractor you have to set up and pay into KiwiSaver yourself. If you pay in at least $20 a week, or $1,043 a year, you’ll get a $521 top-up from the government.
Your rate must cover the costs an employer would pay for if you had a salaried job.
A good method is to take the rate you would earn from a similar salaried job and add at least 20 per cent, eg:
Job sites such as Seek or Trade Me, and recruiters, can help you find this information.
Don’t get stung with fines for late payments. Not paying your GST, income tax or ACC on time could cost you more in penalties. Put aside enough money from every invoice that’s paid to you.
Invoice clients on time and stay on top of your paperwork. If your records are a mess, it’s easy to miss key dates and lose documents Inland Revenue may need.