Nowadays, most workers are hired as regular, seasonal, or fixed-term employees. You might notice such employees complaining about having little time and freedom to do what they want. That’s why more workers are switching to freelancing. Their benefits include an opportunity to earn more, flexibility in time and location, and faster growth opportunities career-wise.
While there are many benefits, being a freelancer can also result in a few complications regarding taxes. As a freelancer, you should know how to file your taxes as a sole-proprietor business owner. You can consider yourself as a boss because you’re self-employed.
But this still depends on the nature of your work and the country you’re working in. It’s essential to file your taxes to avoid several penalties in the future. Such penalties can be imprisonment and payment of fines, interest, and compromise fees. So, to avoid that here’s a quick guide to filing taxes as a freelancer:
Requirements In Filing Taxes As A Freelancer
The Inland Revenue Department (IRD) requires you to have an IRD number to get paid as a freelancer. This number is needed if you’re earning any money, planning to apply for student loans, child support, working for Family Tax Credits, and filing tax returns.
If you don’t have one and you’re an NZ citizen you can apply online through the IRD website or complete a paper application. If you have a resident visa/student visa/work visa, you must submit a copy of your passport. For freelancers who work through a recruiter or a company and don’t live in New Zealand, you don’t need an IRD number as your recruiter is responsible for deducting your tax from your salary.
Furthermore, you will need to fill out and pass your tax forms, such as the IR330C form for NZ citizens filing for taxes as a freelancer.
Filing Your Taxes
If you’re a contractor or a freelancer, you’re responsible for filing a tax return— especially if you do not work through a recruiter and your work business pays you directly for your services. To make sure the correct amount of tax is deducted from your income, you have to fill out an IR330C form. IR330C or Tax Code Declaration is filled out to ensure you’re taxed at the correct rate. Otherwise, you will be taxed 45% of your wages.
Filling in a R330C form can be done online or by hand. Here are the three sections of IR330C you should take note of:
- Section 1: This is the part where you provide your details. It includes your full legal name and your IRD number.
- Section 2: This is where you provide your tax rate details. There’s a required minimum percentage detailed on the second page of the IR330C form. This depends on your income as it increases. You can choose what rate you would like to take out for taxes from your salary, regardless of the nature of your work and your activity number. The scheduler payment activity number is under section 2 as well. This activity number tells IRD what kind of service or labor you provide.
- Section 3: This section is where you would make your declaration. It includes your signature over your printed name and the date you filled out the form. If you’re a solo trading freelancer, you’re not required to fill this out.
Other Tax Obligations
Aside from income tax, you may be liable to other tax obligations. This includes GST, ACC, or Student Loans:
GST: Goods and services tax is a virtual tax deducted from most products and services. Being a GST-registered freelancer, you can claim back the tax you pay on goods or services you purchase for your business. You can also charge GST for your services, acting as a collector on behalf of the government.
ACC Levies: If you’re a freelancer, you will still need to pay for ACC levies and your other tax obligations. The ACC uses the funds gained from these levies to deliver injury claims for all NZ citizens. They can also provide 80% of your income as weekly compensation when you can’t work due to your injury. The ACC sends annual invoices to self-employed workers, so you must prepare a budget for it. The levy rate charged will depend on the type of work you do.
Student Loans: If you applied for student loans to fund your college education, it could be repaid to the government through your salary or wages. It’s essential to use the correct tax code to have correct repayment deductions. If you have multiple jobs, you can apply for a reduced deduction rate on your student loan from your other jobs. You can check out the IRD website for more details.
Being a freelancer can be beneficial as you get to be your boss. You can control and choose your schedule and where you work, and you have a broader opportunity to increase your income. But it comes with a few challenges, too. One of these challenges is filing for your taxes. In freelancing, taxes are less straightforward than when you work full-time. You have to be wary of submitting all the necessary paperwork to avoid being charged with tax evasion.