Tax 101 for sole traders

Sole traders are responsible for preparing, paying and ­filing their own taxes, as part of running a business. To help you accurately plan ahead, we’ve created a guide explaining different taxes and levies, and how they’re calculated. 

As a self-employed sole trader, you’re responsible for calculating, paying, and filing your taxes every financial year. How much tax you’ll owe will depend on a few key factors like:

  • how much you earn
  • whether or not you have a separate PAYE job
  • what industry you belong to.

Because of this, preparing your taxes isn’t as straightforward as setting aside a percentage of your income every time you get paid. Instead, you need to understand how taxes are calculated, so you can accurately plan ahead and avoid expensive surprises.

There are three kinds of taxes and levies sole traders, contractors and solo operators need to be aware of:

1. Income tax

2. ACC levies

3. GST

When planning your cash flow, you might also need to think about:

4. Student loan repayments

5. KiwiSaver contributions.

New Zealand uses a progressive tax system, meaning you don’t pay a set percentage of income tax across all your income. Instead, your income will be split into brackets, each with its own tax rate:

Income tax rates (from 1 April 2021)

Income bracket

Tax rate %

0 to $14,000 10.5%
$14,001 to $48,000 17.5%
$48,001 to $70,000 30%
$70,001 to $180,000 33%
$180,001 and over 39%

Source: Inland Revenue

Let’s say you earn $40,000 as a part-time employee, and $10,000 as a contractor. Your taxable income is the sum total of all income – so in this case, $50,000.

Even though $50,000 falls into the 30% tax bracket, you won’t owe 30% across your whole income. Instead, you calculate your income tax by applying the bands progressively.

Income bracket $50,000 income in Bracket Tax rate % = Tax owed
0 to $14,000 $14,000 10.5% =$1,470
$14,001 to $48,000 $34,000 17.5% =$5,950
$48,001 to $70,000 $2,000 30% =$600
$70,001 to $180,000 $0 33% =$0
$180,001 and over $0 39% =$0

After applying the different brackets, only $2000 of your $50,000 income will be taxed at 30%!

In this example, your total income tax bill will be $8,020. But because $40,000 of your income comes through a PAYE role, most of this tax bill will be paid directly by your employer.

The ACC collects three different levies from all employers and workers in New Zealand.

  1. The Earner’s levy, a flat rate of $1.21 per $100 of your liable income.
  2. The Working Safer levy, a flat rate of $0.08 per $100 of your liable income.
  3. The Work levy, which is based on what kind of business you run. The riskier your line of work, the higher this levy will be.
”Liable income” refers to income between minimum and maximum threshold, as set by the ACC every year.

”Liable income” refers to income between minimum and maximum threshold, as set by the ACC every year.

You can find out more on the ACC website.

Calculating your levies(external link) — ACC

While the Earner’s levy and the Working Safer levy are both straightforward to calculate, you’ll need to find the specific Work levy rate set for your industry.

Use the ACC’s estimation tool to work out how much you’ll need to set aside overall.

Estimate your levy(external link) ACC

GST, short for “Goods and Services” tax, is only applicable to you if you make over $60,000 a year in self-employed income. It’s a straightforward consumption tax of 15% that you collect from your clients – you don’t pay this yourself.

For example, if you sell cakes for $200, and your cake-making business generates more than $60,000 a year, you’ll need to charge GST. The new cost for your cakes will be $200 + 15% GST = $230.

You can calculate the cost of your services and GST using a GST calculator.

Calculate your GST(external link)  Hnry

It’s not a tax, but if you have an outstanding student loan, it is something you’ll need to pay regular instalments on to Inland Revenue.

Student loan repayments are set at 12% of every dollar you earn past the minimum repayment threshold. This is only if you’re based in New Zealand. Different rates and rules apply for people based overseas.

Repaying my student loan when I earn salary or wages(external link)  Inland Revenue

Regular contributions to your KiwiSaver fund will help you better weather market fluctuations and make the most compounding interest.

But if you can’t put a little aside regularly, it’s a good idea to make sure you’re contributing at least $1,042.86 to your KiwiSaver every financial year.

This will ensure you receive the full government contribution of $521.43 towards your savings.

KiwiSaver benefits(external link)  Inland Revenue

Calculating your taxes

If you’re not sure where to get started, you can use this free sole trader tax calculator as an indication of how much to start putting aside.

New Zealand Self-Employed Tax Calculator(external link) Hnry

You can also visit Hnry’s website for more sole trader resources, including a guide to GST and guidance on navigating the end of the financial year.

Hnry(external link)

What is GST, and how does it work?(external link)  Hnry

Navigating the end of the financial year(external link)  Hnry

When you’re deep in the day-to-day of running your business it can be hard to keep track of the bigger picture. Seeking advice from different sources can give you a fresh perspective on your business. Consider getting help from:

Seeking advice from an accountant or bookkeeper can free up time for you to focus on what you do best – your job.

For further information on seeking business planning advice, try the article below.

Getting business planning advice

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