Setting yourself up as a sole trader is a big step. Suddenly, you’re in charge of a self-employed business, with all the admin and financial management responsibilities that come with being a one-person venture. And if you’re new to the world of business, it can be a LOT to take in!
But fear not. By following these seven simple steps, you can cover all the financial basics, while making sure you’re 100% compliant with the Inland Revenue Department’s (IRD) rules.
1. Income tax
As a sole trader, you must track all income coming into your business and complete an annual IR3 tax return, so the IRD knows your total taxable income. If you want, you can choose to pay any tax that’s due in provisional instalments to manage your cashflow more effectively.
2. Tax deductions and business expenses
Running your business will mean incurring some unavoidable trading expenses. You can claim eligible business expenses on your IR3 return to reduce your taxable income. Make sure you keep all invoices and receipts relating to claimed expenses.
3. Goods and services tax (GST)
If the annual turnover of your business exceeds, or is expected to exceed, $60,000, you’re legally required to register for GST. Once you’re GST registered, you must charge 15% GST on relevant customer invoices and will need to file regular GST returns.
4. Accident Compensation Corporation (ACC) levies
As a self-employed individual, you’re required by law to pay annual ACC work levies covering workplace and personal injuries. Invoices are automatically calculated and issued by ACC after you file your annual self-employed tax return.
5. Student loan repayments
If you have a student loan, you’ll need to repay this loan once you’re earning over the annual threshold (currently $24,128). You can work out what you’ll owe using the student loan repayment calculator, with repayments being taken based on your annual taxable income.
6. Record keeping
Under New Zealand law, you’re required to keep accurate, complete financial records and invoices for at least seven years. Using cloud accounting software, like Xero, MYOB or QuickBooks, helps to streamline compliance, income tracking and bank reconciliations.
7. Contracts and invoicing
It’s important to check that your customer terms and contracts are fair and legally compliant. Once you’re up and trading, you’ll need to send invoices to customers with clear payment terms (usually 14 or 30 days) and instructions on how to pay you (direct to your bank account, or via a payment gateway like PayPal).
Good financial management is key to running a successful self-employed business. Clear record keeping, accounting and budgeting keeps your cashflow under control and allows you to see when (and if) you’re making a profit from your new business. Let us know if you need any assistance to go out on your own.
