Taxes for Sole Traders – The Complete Guide

Embarking on your journey as a sole trader in New Zealand is an exciting step towards independence. A crucial part of this journey is understanding and managing your taxes. While tax may seem daunting at first, with the right information, you can confidently handle your sole trader taxes, saving time, stress, and money. This beginner-friendly guide will provide the knowledge and tools you need to confidently master your taxes.

There are three taxes for sole traders that you need to be familiar with:

1. Income Tax
2. GST (Goods and Services Tax)
3. ACC Levies (Accident Compensation Corporation)

As part of understanding income tax it’s also helpful to have knowledge of provisional tax and withholding tax. Both of these are not additional taxes, they are simply ways of paying income tax.

Feel free to reach out with any questions or suggestions for additional content you’d find helpful.

1. What is Income Tax?

Income tax is a tax on the money you earn, including profits from your business as a sole trader. In New Zealand, income tax is applied to individual income, including earnings from self-employment, wages, salaries, benefits, and pensions.

As a sole trader, your business income is considered personal income. After deducting business expenses, you pay tax on the remaining profit (also known as taxable income).

Do I Have to Pay Income Tax?

Yes, if you are earning income as a sole trader, you are required to pay income tax. The amount of tax you pay depends on your profit (your income minus your expenses) for the tax year. If you don’t make any profit, you don’t pay any income tax.

New Zealand has a progressive tax system, this means the amount of tax you pay increases as your profit increases. These increases in the tax rate are know as ‘tax brackets’.

The 2023-24 income tax brackets for New Zealand are:

1. 10.5% for profit up to $14,000
2. 17.5% for profit over $14,000 and up to $48,000
3. 30% for profit over $48,000 and up to $70,000
4. 33% for profit over $70,000
5. 39% for profit over $180,000

What You Need to Do for Income Tax:

1. Calculate Your Profit: Determine your profit (taxable income) by subtracting your business expenses from your business income.
2. File an IR3 Income Tax Return: At the end of each tax year (31st March), you must file an IR3 income tax return, declaring all your income and expenses to the IRD.
3. Pay Tax Due: When you file your income tax return the IRD will then tell you how much income tax you have to pay. Pay the outstanding amount to the IRD by July 7th.
4. Keep Records: Keep a record of all your invoices and your expense receipts (for expenses over $200).

Income Tax Tools:

• IRD Income Tax Calculator: Use the IRD income tax calculator to work out your basic yearly tax.
• Solo Tax App: Solo automatically calculates your income tax live during the year and generates ready-to-file income tax returns.

For more info read our guide on how to file an income tax return (IR3).

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What is Provisional Tax?

It’s important to know that provisional tax is not a seperate tax for a sole trader. Provisional tax is a system for paying your income tax in instalments throughout the year instead of a lump sum at the end of the tax year – it should really be called ‘provisional payments’ instead of a tax.

Provisional tax payments are usually 4-monthly (3 payments per year) by default, or 6-monthly (2 per year) if you also file 6-monthly GST returns.

Do I Have to Pay Provisional Tax?

If this is your first year being self-employed you don’t need to pay provisional tax (but you still have to pay income tax at the end of the financial year).

You have to pay provisional tax if your tax bill was more than $5,000 for the previous financial year. When you file a tax return that requires you to pay more than $5,000 tax, the IRD will automatically begin changing you provisional tax during the next year. By default you will pay provisional tax instalments 4-monthly. The amount that you pay for each instalment will be approximately a third of the amount of tax you paid the previous year.

What You Need to Do for Provisional Tax:

1. Make Payments: Pay your provisional tax in instalments. IRD will notify you about how much each payment is (based on your previous years tax) and when it’s due.

Provisional Tax Tools:

• Solo Tax App: Solo calculates your provisional tax live during the year so you always know how much income tax to put aside.

For more info read our provisional tax guide for sole traders.

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What is Withholding Tax?

Withholding tax, often known as schedular payments in New Zealand, is an income tax deducted at the source of your income. It’s a bit like how an employer deducts tax from an employee’s salary, except in this case, it’s a tax for a sole trader. It applies to specific types of payments usually made to contractors.

The person or company paying you is responsible for sending this deducted income tax to IRD on your behalf. You receive the payment minus the tax. You can still claim expenses when you receive schedular payment income.

Do I Have to Pay Withholding Tax?

This sole trader tax applies if you’re working in certain industries or roles where the payer (like a business hiring your services) is required to deduct tax from your payments. Common examples include contracting in construction, film and television or certain professional services.

What You Need to Do for Withholding Tax:

1. Know Your Rate: Understand the withholding tax rate applicable to your type of service. You can find this information on the Inland Revenue’s website in their tax rate notification form.
2. Provide Information to Payer: Give your IRD number and the correct withholding tax rate to the payer using the tax rate notification form.
3. Record Keeping: Keep a record of all your invoices and your expense receipts (for expenses over $200).

Withholding Tax Tools:

• IRD Tax Rate Estimation Tool For Contractors: Use the IRD tax rate estimation tool to help work out your own tax rate for schedular payments. .
• Solo Tax App: Solo automatically syncs your contractor income and withholding tax directly from IRD to calculate your income tax live during the year. So you always know where you stand.

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2. What is GST?

GST (Goods and Services Tax) is a 15% tax added to the price of most products and services. Most things you buy have GST added to the price.

When you sell products or services you might need to add GST to your prices and pass the GST to the IRD when you file your GST returns.

You can claim the GST back on your expenses. When filing your GST return, you work out the difference between the amount of GST you collected on your income and the GST you paid on your expenses. If you collected more GST than you paid, you pay the balance to the IRD when you file your GST return. If you paid more GST than you collected, you can get a GST refund from the IRD.

You can choose to file and pay GST returns monthly (12 returns per year), 2-monthly (6 per year) or 6-monthly (2 per year).

Do I Have to Pay GST?

You do not have to register for GST just because you start a business. However, you do need to register for GST if you made over $60,000 in the last 12 months, or if you expect you will make over $60,000 in the next 12 months.

The $60,000 income limit does not include the following income types:

• Salary and wages
• Benefits, pension and student allowance
• Long-term rental income (short-term rental should be included)
• NZ interest

What You Need to Do for GST:

1. Register for GST: If your business has a turnover (total sales) of more than $60,000 per year, you must register for GST. You can also choose to register voluntarily even if your turnover is less.
2. Charge GST to your customers: Once registered, you’ll need to include GST in the price of your goods and services and include GST on your invoices. This means you’ll collect GST from your customers on behalf of the government.
3. File GST Returns: You’re required to file regular GST returns with IRD. GST is due monthly, two-monthly, or six-monthly, depending on your preference. In these returns, you report the total GST you’ve collected from customers and the total GST paid from your expenses.
4. Pay any GST you owe to the IRD: After filing a GST return, if the GST you’ve collected is more than the GST you’re claiming on expenses, you pay the difference to Inland Revenue. If it’s less, you get a refund.

GST Tools:

• GST Calculator: Calculate GST on any amount with our simple GST calculator.
• Solo Tax App: Solo automatically calculates GST on your income and expenses, and generates ready-to-file GST returns.

For more info read our guide on how to calculate and file GST returns.

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3. What is ACC?

Everyone who works in New Zealand pays ACC levies. These levies cover injuries that happen at work, at home, on the sports field, and when you’re out and about. Basically ACC (Accident Compensation Corporation) is New Zealand public health insurance.

Unlike employees, who have their ACC levies covered by their employer, as a sole trader, you are responsible for covering this levy yourself.

Do I Have to Pay ACC?

Yes, when you start out as a sole trader, you’re automatically on ACC’s CoverPlus. What you pay will be based on the type of work you do and your income. There is an exception, if you earn rental property income you do not need to pay ACC on this income.

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.

What You Need to Do for ACC:

1. File your Income Tax return: Your ACC levy is based on your earnings in your income tax return. The more income you make, the more ACC you pay.
2. Pay Your ACC Levy Invoice: When you receive your yearly ACC levy invoice, review it and pay it by the due date to maintain your coverage.

ACC Tools:

• ACC Levy Calculator: Use this ACC levy estimate tool to estimate how much your ACC levies will be for the year
• Solo Tax App: Solo automatically calculates your ACC levy live during the year so you always know how much to set aside.

For more info read our ACC guide for self-employed.

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