Would I make more money if I was a Contractor?
There are many benefits to working as a contractor – you set your own hours, you choose the jobs and the clients you work for and all the income is going in your pocket. But before you hand in your resignation, you need to understand what it really means to be a contractor.
There are differences between a contractor and an employee. A contractor has flexibility in choosing what work to do, how to do it and where to do the work from. This is at set at their discretion and will be outlined in their ‘Contract for Services’. These decisions are made for an employee by their employer, and specified in their ‘Employment Agreement’. An employee has tax and ACC deducted from their wages and is entitled to a minimum amount of sick and annual leave each year, plus public holidays. A contractor is responsible for all their own costs including tax and ACC, and there are no public holidays or leave accruals – if you don’t work, you don’t get paid.
Because a contractor must cover their own costs including saving for holidays or sickness, their hourly rate of income is higher than their employed equivalent. That’s because paying for all those expenses falls on the employer, so the net (leftover) amount paid to the employee must be less. We recommend to budget for at least five days a year that you’re too sick to work. If having time out on public holidays is also important, be sure to factor in the 11 public holidays per year too. You may also have a few set-up costs such as buying your own equipment, tools and work vehicle.
When you start out contracting it’s tricky to get your hourly rate right. If it’s too high you won’t get the work, but if it’s too low you may end up out of pocket. A good rule of thumb is to add 20% to the normal hourly rate you’d earn doing the same job for wages. This is to cover the things an employer would pay for you such as annual leave, sick leave, public holidays, ACC, tax and expenses.
Contractors aren’t automatically enrolled in a Kiwisaver scheme, and you’ll no longer have the added employer contribution. If you want to start/continue with this as your retirement savings you will need to pay into this yourself and budget for this in your hourly rate.
It is important to get your structure right. This means if you’re trading in your own name (sole trader) or as a company, or something else more suitable to your personal circumstances. It is easier and cheaper to the right advice and structure in place before you start self-employment. Other key things to know are if you should register for GST, how much you should save for GST and tax and when are payments due, what records you need to keep and what expenses can you claim.
Contracting isn’t for everyone. It can be much more stressful if contracts only last for a few weeks at a time and gaps between contracts are long and unexpected. Time management is a must to not only manage upcoming work (or lack of) but also the responsibility of paying for bills, making filing deadlines for GST and tax, 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. PKF Kerikeri is passionate about giving you the right advice at the right time. Our expertise as business advisers will set you up so you don’t repeat the common mistakes. Call us today to see how we can help you.