I'm a Contractor: How do I manage GST and WHT?

If you're a contractor or freelancer, there are a few things you should know about GST and withholding tax (WHT).

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If you expect to earn $60,000 a year you need to register for GST

That is, if you are invoicing $5,000+ a month, on a regular basis, then you should register through MyIR. If you are GST registered, then you add 15% GST to your service fees, and pay the GST you collect to IRD. You can also claim back the GST you have paid on your business purchases and expenses.

You can lodge GST returns on a 6 monthly, 2 monthly or 1 monthly frequency. You can choose invoice, payments or hybrid basis, which determines if you disclose GST when invoiced or when paid. Most of our freelancers choose to file GST returns 6 monthly on a payments basis, so they don't have to prepare their GST return very often, and they can refer to their bank statements for adding up income and expenses.

What is withholding tax (WHT) and can I choose my own rate?

Contractor income is called schedular payments by IRD, and withholding tax (WHT) is a type of income tax that is deducted from schedular payments and paid directly to IRD by the customer paying the invoice.

The usual rate of WHT is 20% and that is typically a good rate for someone earning up to $100,000 a year after deducting expenses, because it means you have less than $5,000 to pay in terminal tax and you won't have to pay provisional tax. If you earn more than $100,000 a year, then you can opt for a higher WHT rate. If you earn less than $50,000 a year, you may want to select a lower rate of WHT.

If you would rather not have WHT deducted, you can apply to IRD for a certificate of exemption (COE) which you have to show to the customers paying your invoices. This may be because you have lots of expenses that you can claim back, or it may be that you prefer to manage your tax payments yourself, or it may be that the payer doesn't want to register as an employer for a one-off payment. If you are a NZ resident contractor paid by a labour hire customer under a labour hire agreement, then you have to apply for tailored tax rate of 0% instead of a COE. In both of these cases, you have to pay provisional tax directly to IRD instead.

What do I show on my Customer Invoice?

When GST & WHT registered, a typical contractor invoice will look like this:

Tax Invoice

Contractor name, GST number

Invoice date
Name and address of recipient

Services description

$1,000.00

Less WHT (20% of the $1k)

(200.00)

Plus GST (15% of the $1k)

$150.00

Total Invoice

$950.00

Payment terms and bank account details

 In the example above, the customer pays $950 to the contractor and $200 to the IRD. The contractor completes a GST return at the end of the filing period, and pays $150 to IRD.

 At the end of the income tax year, usually 31 March, the $1,000 income is included in the contractor's income tax return, and the $200 WHT is treated as a credit (reduction) against the income tax payable.

 Working out your taxes can be the most challenging part of being a contractor. Team up with a chartered accountant to help you navigate the complexities, so you can get on with what you do best.

-          Serena Irving

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Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

A well-written article like this, which is general in nature, is no substitute for specific tax advice. If you want more information about the issues in this article, please contact the author.

If you're looking for other useful information for freelancers, like what expenses you can claim, refer to our previous article: https://www.jdw.co.nz/newsletters/blog/jdw/setting-up-as-a-freelancer