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, completing 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 and avoid expensive surprises.
There are three kinds of taxes and levies sole traders, contractors and solo operators need to be aware of:
- income tax
- ACC levies
- GST.
When planning your cash flow, you might also need to think about:
- student loan repayments
- KiwiSaver contributions
- independent earner tax credit (IETC).
Follow the checklist for sole traders to help you work through financial essential tasks.
Start the sole trader checklist
There are alternatives to managing your finances on your own. You could use online accounting software, or work with an accountant or bookkeeper.
If you can’t pay your debts on time, it’s important to act fast. Talk to those you owe money to – they may agree to a more manageable payment plan. Also check if you are getting paid on time so that you can manage your cash flow.
Income tax
If you pay your tax right, you can qualify for a first-year tax discount and avoid potential penalties.
Your net profit – what you earn after paying work related expenses – is taxed through your IRD number based on how much you’ve earned in your financial year.
While you’re a sole trader, you must file IR3 income tax return at the end of each year.
If you pay all your first-year income tax before the financial year-end on March 31, you may qualify for a discount. Talk to an accountant about how you can do this.
See how your income will be split into brackets
New Zealand uses a progressive tax system. This means you don’t pay a flat rate percentage of income tax on all your income. Instead, your income is 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.
Changes to income tax brackets are expected to apply from 1 July 2024.
ACC levies
When you first start out, you automatically get ACC personal injury cover from day one. It’s called CoverPlus. What you pay will be based on the type of work you do and your liable earnings.
You can choose to change to CoverPlus Extra which gives you more control over how much of your income you want ACC to cover and means you can lower the levies you pay.
Your first levy invoice will arrive after the end of your first year in business. After that, you’ll be invoiced once a year, usually in July or August.
Types of cover for self-employed(external link) — ACC
The ACC collects three different levies from all employers and workers in New Zealand.
- The Earner’s levy, a flat rate of $1.33 per $100 of your liable income.
- The Working Safer levy, a flat rate of $0.08 per $100 of your liable income.
- 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.
You can find out more on the ACC website.
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.
GST
Generally you are liable for GST (Goods and Services). It is only applicable to you if you make over $60,000 a year in self-employed income.
If you earn over $60,000 a year in self-employed income, click “read full”.
It’s a 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
If you’re GST registered, you can claim back GST you pay on things you buy for your business. You will also charge GST on what you sell, collecting the GST on the government’s behalf.
You can choose to voluntarily register for GST even if your annual turnover is less than $60,000. If you’re not sure whether you’ll earn more than $60,000 in a year, talk to an accountant about what your options are.
Registering for GST(external link) — Inland Revenue
Student loan repayments
It’s not a tax, but if you have an outstanding student loan, you’ll need to make regular repayments 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
If you have a student loan, as soon as you earn more than $20,020 you’re required to make repayments.
If you’re self-employed or earn income from other sources, you will need to make your own student loan repayments, this can be done when paying your year-end income tax.
The amount of your student loan repayments depends on your adjusted net income.
Paying off your student loan if you’re self-employed(external link) — Inland Revenue
Making voluntary student loan repayments through the year will help spread the load.
Case study
Writing right
Anna is a freelance writer. In her first year of business after graduating university, she earns $40,000. This self-employed income is her only income for the year.
To calculate her end-year student repayment, she subtracts the annual repayment threshold from her income (currently $20,020), and multiplies the difference by 12%.
| Adjusted net income (income aside from salary and wages) | $40,000 |
| Adjusted net income – annual repayments threshold ($40,000 - $20,020) | $19,980 |
| End-of-year repayments (19,980 x 0.12) | $2,397.60 |
KiwiSaver
Regular contributions to your KiwiSaver fund will help you better weather market fluctuations and make the most of 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
Independent Earner Tax Credit (IETC)
The independent earner tax credit (IETC) is an entitlement for individuals – including sole traders and contractors – depending on your income after expenses and losses for the relevant financial year.
Depending on your income, you’ll claim your IETC when you:
- file an individual tax return (IR3)
- receive your automatically issued income tax assessment.
If you have a tax advisor, ask them to help you do this.
Independent Earner Tax Credit(external link) — Inland Revenue
Grab a first-year tax discount
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
Hnry also has guidance on GST and how you can navigate the end of the financial year.
What is GST, and how does it work?(external link) — Hnry
Navigating the end of the financial year(external link) — Hnry
Getting advice
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:
- a traditional accountant
- a digital accountant
- business mentors
- investment advisors
- business incubators
- Regional Business Partner Network(external link)
Seeking advice from an accountant or bookkeeper can free up time for you to focus on what you do best – your job.
