Contracting gives you freedom, but it hands you the tax job your old employer used to do. This is the plain-English version of everything a NZ contractor needs to keep on top of, so your first year-end isn't a nasty surprise.
Quick answer
As a contractor you are taxed on your profit (income less legitimate expenses), not on your gross invoices. Some of your work may have tax withheld at source under the schedular payments rules, but that is only a prepayment. You still file an IR3, you may have to register for GST once turnover crosses $60,000, and once your tax bill passes $5,000 a year you move into provisional tax.
The single biggest mistake new contractors make is spending the whole invoice and leaving nothing aside for tax. Setting money aside as you go is what keeps year-end calm.
How contractor tax actually works
There are four moving parts. None is complicated on its own.
- Income tax on profit. Add up what you invoiced, subtract your real business costs, and you are taxed on what is left at the normal individual rates.
- Schedular payments. Certain types of contract work (labour-only trades, some consultants, certain agency arrangements) have tax withheld by the payer. You give them a completed IR330C and choose a withholding rate. That tax is a credit against your final bill.
- GST. If your turnover crosses $60,000 in any 12-month period you must register, add 15% to your invoices, and file GST returns. You then also claim the GST back on your business purchases.
- Provisional tax. Once your residual income tax for a year tops $5,000, you pay the next year's tax in instalments rather than one lump.
Tie these together and the picture is: invoice, set aside roughly a third for tax and ACC, claim what you are entitled to, and file an honest IR3.
A simple example
Imagine a freelance designer in their first full year:
| Item | Amount |
|---|---|
| Invoiced (excl. GST) | $85,000 |
| Business expenses | $12,000 |
| Taxable profit | $73,000 |
That $73,000 is taxed at the individual rates, with ACC levies invoiced separately on top. Turnover is over $60,000 so GST registration is required. And because the resulting tax bill is well over $5,000, the designer steps into provisional tax for the following year. A rule of thumb of putting aside about a third of each payment would have covered income tax and ACC comfortably.
Common mistakes to avoid
- Treating withheld tax as the end of the story. Schedular tax is a prepayment. If your real rate is higher, you still owe the difference at year-end.
- Picking too low a withholding rate. A low rate feels good monthly but builds a debt for March.
- Ignoring the $60,000 GST line. Cross it and you must register, even mid-year.
- Forgetting ACC. Levies are separate from income tax and land as their own invoice, often catching first-year contractors off guard.
- Mixing private and business spending. Keep a separate account so expenses are easy to prove.
Where this fits in your return
Your contract income, expenses and any withheld tax all come together on your IR3. GST is filed separately on its own cycle. If you have a family, your contractor profit also feeds your Working for Families entitlement, and the rate you choose for any withheld work is covered in detail on our withholding rate guide.
How Fernway can help
We set you up properly from the start: the right GST registration timing, a sensible withholding rate, a simple expense system, and a clear amount to set aside each month. At year-end we prepare and file your IR3, claim everything you are entitled to, and tell you your provisional tax position before it becomes a surprise. Fixed fee, quoted up front.
Book a free 20-minute review and we will map out your first year.
This is general information only, not personalised tax advice. Confirm your situation with us or check ird.govt.nz.
In plain English: you are taxed on profit, not turnover; set aside about a third of every payment for tax and ACC, watch the $60,000 GST line and the $5,000 provisional-tax line, and file an honest IR3.
This is general information, not personalised tax advice.See our full disclaimer.