Being a sole trader: 9 frequently asked questions

We know that operating as a sole trader can be confusing, so we’ve put together a list of frequently asked questions to answer the questions you may have. ​

YES! It’s relatively easy to switch to other business structures from a sole trader. ​

Many people start as sole traders and switch to other business structures when their businesses grow. Before you make any changes, please consider the following:​

Read more: I’m a sole trader, can I restructure my business to a company? ​

Sole trader is a business structure, and self-employment is the way you work. ​

Being a sole trader is a type of business structure self-employed people can choose. Sole trader business structure is easy and cheap to set up. For example, freelancer designers and IT consultants are often sole traders. Being a sole trader means that you have complete control over how you run your business and are responsible for everything that happens to it. ​

Self-employment means the way you work, rather than the business structures you choose. As long as you are working for yourself, you could choose to operate as a sole trader or a company. Being self-employed means you are not working for someone else for PAYE. You also will not get holiday pay, sick leave or annual leave. ​

Read more: Should you class your business as a sole trader or a company?​

The simple answer is NO. There is no legislative requirement for you to register with the government as a sole trader. Unlike a company, you will have to register with Company Office. ​

To become a sole trader, all you need to do:​

Unlike companies which are automatically given an NZBN, sole traders need to register for one if you want. Here is how you can get your NZBN as a sole trader.  You should also let IRD know if you intend to hire any staff. ​

Finding a reliable accountant is the key. But it’s always a good practice to have some commercial and accounting knowledge when you are running your own business. ​

Taxes can be a headache for sole traders. When the tax season comes around, here are some top tips to make life easier:​

Sole traders are taxed as individuals in New Zealand. This means, as a sole trader, all your income are taxed together. The progressive or gradual tax rates for individuals apply. This means that as your income increases, your rates increase. From 1 April 2021, individual tax rates are below:​

​

​

At the end of the financial year, sole traders must file an IR3 tax return with IRD. A 6.7% discount on tax may be applied if you meet certain criteria.​

Check out IRD’s individual tax calculator here. ​

Read more: A guide to income tax for business owners​

Income tax is essential. But you will also need to consider GST if applicable. ​

If you’re GST registered or required to register, you’ll need to pay IRD the amount of GST you charged your customers on goods and services that you sell. GST is applied to most goods and services at a rate of 15% in New Zealand. ​

You’re also required to pay income tax on your taxable income. If your last year’s residual income tax is over $5,000, you are required to pay provisional tax. Provisional tax is a way to help to manage your cash flow by paying the next year’s estimated income tax with 3 instalments. In certain circumstances, you may be eligible for a 6.7% tax deduction. ​

Read more: Residual vs Provisional vs Terminal taxes - confused?​

Kiwisaver is flexible when you are self-employed - you can decide whether to join Kiwisaver or not. If you’ve decided to join, you can choose how much you’re willing to contribute and when. It’s also your choice to decide which Kiwisaver provider to use.​

Although opting in Kiwisaver is optional for sole traders,  contributing on a regular basis provides a phenomenal benefit. The government will give you $521.43 per year whenever you put in at least $1,042.86 yourself.​

Read more: How self-employed people can make the most of Kiwisaver?​

As a sole trader, you're automatically enrolled in CoverPlus. Your liable earnings and the type of work you do determine how much you need to pay. You can see more information here.​

You can switch to CoverPlus Extra, which lets you choose how much of your income ACC covers if you have an accident and can’t work. This means you can lower your ACC levies. Sole traders with fluctuating incomes (e.g., seasonal income) and those who are newly self-employed without an earnings history are well-suited for CoverPlus Extra.​

Read more: How does ACC work if you’re self employed?​

YES, you can hire staff when you are a sole trader. The process of hiring staff and meeting IRD filing liability has no difference to any other business structure. You will need to have a proper employment agreement with your staff. You will need to register for PAYE on IRD and start payday filing. There are apps online that could help you to better manage your payday filing, such as PayHero. ​

However, to hire your partner or family members you need to obtain pre-approval from IRD. If you intend to do so, please let your accountant know. They could help you to communicate with IRD and apply for pre-approval. ​

It depends. Whether you need to charge GST as a sole trader or not depends on if you’re required for GST registration. The annual income threshold for registering GST is $60,000 in New Zealand. This means if your annual business income exceeds $60,000 or you expect to exceed this threshold, you must register for GST. If your annual income doesn’t meet the threshold, you still can become GST registered voluntarily. ​

If you’re GST registered, you’ll need to charge GST at a rate of 15% on goods or services you sell. For example, if your hourly rate is $100, then you need to charge $115 to your customers ($100*1.15). However, there are special cases when the GST rate is at 0% or the supplies are exempted from GST. ​

Read more: The basics business owners need to know about GST​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would.​

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today. ​