It's pretty common for someone starting out in business to invoice a client, and then wonder how tax is paid. In New Zealand its common for employees not to see any of the taxes they pay. So how do you pay tax as a new contractor or startup?
Do you need to pay tax?
A Company or Individual will need to pay tax on profit they make during a financial year. This means that any expenses directly related to producing income can be offset, for example purchasing supplies in order to invoice a customer. Where startups can get caught is purchasing assets such as computers initially, which should be depreciated over time, and not immediately deductible in full against your taxable income.
How to pay?
There are a few methods open to paying tax as a business, for example a contractor might:
- agree for clients to deduct withholding tax and remit it directly to the IRD with their payroll returns, and/or;
- accumulate taxes and pay under the provisional tax regime.
If operating under withholding tax, it's likely that your final tax outcome for the year will be different to the total amount of withholding tax deducted, and a tax return will still be required to figure out the difference.
In terms of making payment, this is usually done via bank transfer on certain days in the year.
What's Provisional Tax like for new businesses?
Problematic. Some businesses can start trading and not pay any income tax for a year or more. This is because provisional tax is based off last year's income. We spend a lot of time with clients trying to get our heads around what is coming up in terms of tax payments, projecting long into the future so all outgoings are accounted for.
We recommend talking with experts on tax as soon as possible to know what you will need to pay and when to avoid any late payment penalties and interest.
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