How do Contractors and Freelancers Pay Tax?

Being a Freelancer or Contractor means you’re responsible for your business and your tax.

Income Tax is the tax on your income you have earned, less any deductible expenses.  Individuals and Companies file annually with Inland Revenue to determine tax payable.  Typically contractors and freelancers will be individuals and this income will be taxed at the following rates for the 2018 year:

Tax Rates for Contractors and Freelancers

Source: Google / Wikipedia


The Big Three

Freelancers and Contractors pay tax in three ways:

  • Withholding Tax
  • Provisional Tax
  • Terminal Tax

Withholding Tax - has become more prevalent recently with the introduction of tax changes for contractors working with labour-hire firms.  This means that more tax is being directly withheld from the contractor and paid directly to the IRD.

Provisional Tax - is the tax you pay in advance of completing your tax return for the year.  This is based off your net taxable income from last year and falls on two/three dates during the year:

  • If registered for GST on six monthly basis: 28 October, 15 May
  • If not registered for GST, or on two monthly basis: 28 August, 15 January, 15 May

Terminal Tax - once your tax return has been calculated and the above two taxes have been deducted, there will either be a refund or tax payable.  There is a large gap between the end of the financial year and payment of Terminal Tax.


Making it Easier

We find matching tax payments with business activity to be the easiest way for contractors to manage their tax.  This usually means either they contribute a % of their income (see effective tax rates above) as its earned into a savings account, or paid straight to the IRD.  Some clients also setup weekly or monthly automatic payments to pay down large amounts over time.


Got a Question?

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Disclaimer: Information provided to the best of the authors knowledge at time of publication.  Laws are subject to change and independent advice should be sought.  The above information is general in nature and should not be construed or relied on as a recommendation.