Would I make more money if I was a contractor
28 Feb 2020
There are differences between a contractor and an employee. A contractor can choose what work to do, how to do it and where to work from. This is at their discretion and outlined in their “Contract for Services”. For an employee, these decisions are made by their employer, and specified in their “Employment Agreement”. An employee has tax and ACC deducted from wages and is entitled to sick and annual leave, plus public holidays. A contractor is responsible for their own tax and ACC, and there are no leave or public holiday accruals – if you don’t work, you don’t get paid.
Because a contractor covers their own costs including saving for illness or holidays, their hourly rate is higher than their employed equivalent. That’s because paying for those expenses falls on the employer, so the net (leftover) amount to the employee is less. We recommend budgeting at lease 5 sick days per year. If having public holidays off is also important, you’ll need to factor in 11 public holidays per year. You may also have set-up costs such as equipment, tools and vehicles.
When you start contracting it’s tricky to get your hourly rate right. Too high you won’t get the work, but too low you may end up out of pocket. A good rule of thumb is to add 20% to the hourly rate you’d earn doing the same job for wages. This covers the things an employer would pay such as tax, ACC, sick leave, annual leave, public holidays and expenses.
Contractors aren’t automatically enrolled in Kiwisaver, and you’ll no longer have the added employer contribution. If you want to start/continue with Kiwisaver, you’ll need to pay into this yourself and budget for this in your hourly rate.
It’s important to get your structure right, whether you’re trading in your own name (sole trader), as a company, or something more suitable to your personal circumstances. It’s easier and cheaper to get the right advice before becoming self-employed. Other key things to know are registering for GST, saving for tax, when payments are due, records you need to keep and expenses you can claim.
Contracting isn’t for everyone. It can be stressful if contracts only last a few weeks and gaps between contracts are long and unexpected. Time management is important to manage upcoming work (or lack of) and the responsibility of paying bills, making tax filing deadlines, as well as paying these taxes plus ACC. However, for the organised and ambitious amongst us, it can be more rewarding and profitable than paid employment.
If you are considering becoming a contractor we recommend you get advice from a business/tax advisor first.
PKF Poutsma Lemon (Kerikeri) Limited