Managing and paying your taxes as a sole trader isn't something to be intimidated by, but it's important to understand your obligations.
In this guide, you'll learn about lodging tax returns as a sole trader, when and how you need to pay income tax, and how to manage your taxes.
What is the sole trader tax rate?
A sole trader tax rate is calculated and paid as an individual tax rate, so your rate will depend on the total you earn minus business expenses each year. When calculating this, you must add any PAYE income you earn from other employers.
You can find your tax rate on the Inland Revenue website.
When do sole traders need to lodge a tax return?
Sole traders need to lodge a tax return by 7 July every year. This tax return covers your income and expenses from the previous tax year – that's 01 April to 30 March.
What are the tax obligations of a sole trader in New Zealand?
The tax obligations of a sole trader in New Zealand are similar to those earning PAYE income. However, if you're earning PAYE, your employer will pay your tax for you. As a sole trader, you're responsible for making the payments at the end of the year.
You may also have other tax requirements, depending on what you earn. Here's what you need to do.
Use your individual IRD number to file your tax returns
Use your individual IRD number to file your tax returns, not your New Zealand Business Number.
Pay ACC levies
Paying ACC levies every year is your responsibility as a sole trader. The amount you pay is based on your earnings and industry, and you'll be invoiced at the end of the financial year. You can create an account on the ACC website and calculate how much this will likely be so you can set aside money throughout the year.
Report all business income on your individual tax return
Reporting all business income on your individual tax return is the law, including any payments you received in cash or to a separate bank account. This is necessary to calculate the correct amount of tax you need to pay as a sole trader.
Register for GST if your yearly GST turnover is $60,000+
You must register for GST if your yearly GST turnover is $60,000+. If your turnover hasn't reached the threshold yet, you might still choose to register, but it's not required.
Pay tax on all income
You need to pay tax on all income. This includes revenue from your business, interest payments and any PAYE income from an employer.
You may need to pay provisional tax
You may need to pay provisional tax. This is your income tax, but you prepay it in instalments throughout the year rather than as a lump sum. You'll have to pay provisional tax if your annual tax bill is at least $5,000. This starts the following year – so if you owe $5,000 of income tax in 2024, you'll need to pay provisional tax in 2025.
The instalments are usually paid three or six times a year, and IRD will be in touch if you need to make these payments.
Tax differences between a sole trader and a company
Tax differences between a sole trader and a company are that a sole trader uses a personal IRD number for tax returns, and the end-of-year tax is calculated as a personal tax return.
A company has a separate IRD number. Shareholders file individual tax returns, and a return is lodged for the business. A company also has stricter regulations it has to comply with.
How to manage your taxes as a sole trader
Managing your taxes as a sole trader means you stay compliant with the IRD and aren't faced with surprise bills. To do this, record everything you earn and spend throughout the year – the simplest and most efficient way is with accounting software, like MYOB. You also need to keep receipts and bank statements for seven years. Here's what you need to do:
Keep track of your business income and expenses
Keeping track of your business income and expenses is vital. It means you have accurate financial information at the end of the tax year. It pays to open a separate bank account for your business, so business transactions are easy to identify. You can transfer yourself a wage for personal spending.
Employ the assistance of accounting software
Employ the assistance of accounting software that links with your business bank account so every transaction is recorded. This makes it easy to code your earnings and expenses as they happen and generate the reports needed to lodge your tax return at the end of the year.
Hire an accountant
Hire an accountant to ensure your taxes are filed correctly and all your expenses are deducted properly. You can file your returns yourself, but bringing in an expert saves time, stress and potentially an unexpected bill if you get things wrong. Your accountant's fees are classed as a business expense.
How to prepare and lodge a tax return as a sole trader
Knowing how to prepare and lodge a tax return as a sole trader is an important part of running a business. Follow the steps below to ensure you meet all your tax obligations.
Calculate your total business income for the year
Calculate your total business income for the year using the transaction records from your bank account. Accounting software like MYOB makes it easy to report on your annual turnover. Make sure you also note any cash payments you received.
Calculate all your tax-deductible business expenses
Calculate all your tax-deductible business expenses – the money you've spent on running your business. Tracking expenses means you may pay less tax. For example, if you work from a home office, you can claim the percentage of household running costs used for business purposes against your income. This means you record less profit.
Create a MyIR account
Create a MyIR account at Inland Revenue’s website. You'll need a RealME login for this.
Fill out your tax return
Fill out your tax return as a sole trader – this means filing an IR3 with the IRD. You'll need your total income and expenses handy, as well as details of any other income earned.
Hire an accountant to prepare and lodge your tax return on your behalf
Hiring an accountant to prepare and lodge your tax return on your behalf can ease tax stress as a sole trader. Even if you're using an accountant, keeping an accurate record of all your transactions or using accounting software throughout the year is important.
Sole trader tax FAQs
Can a sole trader lodge their own tax return?
A sole trader can lodge their own tax return. It's your responsibility to prepare and file these when self-employed, but it's worth hiring an accountant to do it for you, especially if you are unfamiliar with the process.
How does provisional tax work for sole traders?
Provisional tax for sole traders is an obligation to pre-pay your annual tax bill in instalments throughout the year rather than a lump sum.
You need to pay provisional tax if your tax bill the year prior was at least $5,000. You'll be contacted by the IRD if you need to set this up.
Should I pay myself a wage and KiwiSaver as a sole trader?
You should pay yourself a wage and KiwiSaver as a sole trader, just as your employer would if you were an employee. By paying yourself a regular wage, it's easier to track your business expenses and keep them separate from personal spending. The government will also contribute $0.50 for every dollar you invest in KiwiSaver each year, to a maximum of $521.43.
You can pay your KiwiSaver through your online banking. If possible, try to invest a minimum of $1,042.86 per year to get the full government contribution.
Get on top of tax and back to business
Being familiar with tax obligations as a sole trader can save end-of-year stress and time. If you keep accurate financial records and estimate your tax rates and ACC levies, you can rest easy — knowing you won't get hit with anything unexpected come tax time.
Finding accounting software for sole traders and hiring an accountant can ensure everything is filed correctly, leaving you to get on with running your business. Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Administration Act 1994 and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your GST returns or annual tax statements, then you should consult with your accountant or other registered tax adviser.