Would anyone be able to offer advice to an individual who is on the verge of becoming a Sole Trader/Self-employed? I have had some thoughts about how to set-up my accounts/income/invoicing/tax, however it would be great to hear from anyone who has had actual experience in this regard.
I’m no financial advisor but what I do is have a separate account to which my self-employment income is paid into. Once a month I figure out the income tax, gst and acc levy and transfer what is left over to my household account, leaving my tax obligations behind in that account so when it comes time to pay my taxes, it isn’t a hit on my household cashflow. I use this account to offset against my mortgage so the tax monies that I’m holding reduces the interest payable on my home loan. I’ve been using this system for about 4 years now and it’s worked really well for me.
Cool, thanks __
I figured it would be some sort of arrangement in this manner. I was going to set-up two accounts. One for which income is paid into and one for which I’d place Tax/ACC/GST until the end of the year.
As you’ve stated above, I’d receive income into the one account then calculate and distribute it accordingly once a month.
Glad I seem to be on the right track anyways!
You can pay your GST (and even provisional tax) more regularly than annually should you choose to do so. I like to pay my GST monthly as it is not a lot and I suspect that I could well have mislaid a few receipts by year’s end.
And writing big cheques to IRD hurts!
I do my accounts and invoicing via xero. You can take advantage of a 30 day free trial to see if it is right for you www.xero.com/nzbusiness Setting up accounts etc right from the word go saves heaps of headaches further down the track and leaves you to concentrate on what you do well-your business! Good Luck
It is good practice to seperate your personal accounts from your business accounts. This way the bank will have a clearer under standing on how the business is performing, and the bank can identify potential pain points or oppurtunities to save fees and interest on lending that you might have in place.
I agree with ALEXACB - in addition its also recommended to not dip into the business account for personal expenses (eg: coffee, take away lunch etc) but rather pay yourself a wage each week into your personal account or you could take out drawings. Just like ALEXACB said - that way the bank will know what the business requires in terms of facilities and hopefully be able to support you better.
Further to what Lianne and ALEXACB has stated. When it comes to applying for potential business lending in the future, the bank will require the entities to be separate (eg. Mitglied and Mitglied trading as ABC lawnmowing), so it’s best to start out with the right set up to save you some time in the future. We recognise that Small Business owners are always short of time!!
I am in a similar situation to Mitglied and found this page very useful http://www.business.govt.nz/tax-and-reporting/business-tax-levies/getting-started-with-tax/tax-obligations-and-registrations-for-new-businesses
Note this mentions that if you make voluntary provisional tax payments in your first year you may get a discount - however I have had trouble finding reference to this on the Inland Revenue website, so might be best to give them a call to check they still offer it. Although if you are putting aside money for your tax payments in an account offsetting against your mortgage, you may be better off leaving it there until you have to make the payments - must work that one out!
The IR site also has some advice on record keeping and budgeting for tax payments - https://www.ird.govt.nz/yoursituation-bus/starting/obligations/
From personal experience being self-employed, it’s important to select the correct category of work you’re in (my category was a bit obscure) - I received a surprise bill from ACC which was incorrect all because I didn’t categorise my business right!
My advice go and speak to a chartered accountant. Not just any “Accountant” there is a huge difference. They will be able to advise you first how much to put away for tax if you can estimate your likely income. Please keep your business and personal bank accounts separate. Better yet, have them with entirely different banks. Certainly you should have one account for business and one for tax. If you are paying yourself a living wage or drawings from your business just take out one lump sum per month. Of course you will have a budget. If you have a bookkeeper to do your accounts you should save money by them not having to process individual personal withdrawals. Also having transactions on a business account that consistantly go to the casino and pubs and entertainment does not look good if the IRD decide to audit your books for whatever reason, or you need to apply for hardship. The truth about peoples lives show up on their bank statements. That’s worth remembering.
The discount for voluntary provisional tax payments can be found at the link below. It is not limited to the first year in business, but rather it’s available if voluntary provisional tax payments are paid the year before provisional tax is incurred. Keep in mind provisional tax is only required if the tax due exceeds $2,500. When this occurs in the timeframe of a business depends on how quickly a business owner can get to over $19,880 taxable profit.
Provisional tax: http://www.ird.govt.nz/provisional-tax/