Generally speaking if you are charging others for goods and/or services with a view to making a profit (your aim does not need to be the result) you are usually operating a business and liable to file a tax return and pay tax on any profit (or claim the loss against any other income if you made a loss).
When you have a business you have a range of responsibilities and costs that come with that. Deciding to start a business without doing your homework is like sitting your drivers licence test without studying the road code first. Here are a few things you should think about around the costs that you may not consider at the beginning, as explained further below.
If you form a company, then various formal steps are required. But even if you start as a sole trader, you should notify Inland Revenue so that they can record you are self-employed. There are three good reasons for this:
- Firstly, to register for accident cover with ACC. Inland Revenue will in turn notify ACC to provide you with the appropriate cover. Otherwise, if you have an accident, you may not have your claim accepted from the date you say you went into business unless the date has been recorded somewhere (with Inland Revenue in this case). This applies both to the start of a full-time or any type of part-time business (such as in the evenings) even if you are still employed.
- Secondly, so that Inland Revenue can correctly code the computer to send you the appropriate Business Tax forms at the end of the financial year. These forms will help to remind you of your obligations.
- Thirdly, to help you with your claims for business expenses. The reason for this is that Inland Revenue is unlikely to let you claim for equipment you bought some time ago when you were operating as a hobby. So if you want to claim legitimate business expenses, such as extra equipment you might need to buy, stationery, signage, etc., start keeping proper records immediately and let Inland Revenue know you’re ‘in business’.
You can then give your records to your bookkeeper or accountant at the end of your first financial year. Note: the most common ending for a financial year is the 31 March. Even if you haven’t been trading for a full 12 months before the 31 March, you should still give your records to a bookkeeper or accountant for them to prepare a return for Inland Revenue.
The best way to let Inland Revenue know of your intentions is by phone. But remember that Inland Revenue phone lines are open until 8 pm each weeknight, and to 1 pm on a Saturday. So ring after normal business hours: it’s quicker.
One of the main things to think about is putting funds aside for your taxes as per my blog earlier this year. I would like to add to that list of what things you will have to pay for as there have been some questions around this.
Income Tax Returns
Your income tax return is due on 7 July each year, unless you have an extension of time to file. If you have accountant or tax agent, they may also get an extension.
- If you’re a sole trader, file an Individual income return (IR3).
- If you’re in a partnership, each partner needs to file an IR3 and your business needs to do a partnership income tax return (IR7).
- If your income set up as a company, your business needs to file a companies income tax return (IR4).
You’ll also need to include either a copy of your business’s financial statements, or a form summarising your income and expenses (IR10) from your financial statements.
You can put this financial information together yourself if you have the time to do research and understand what you can and cannot claim as part of putting together a profit and loss statement and balance sheet. Otherwise a tax agent or accountant is trained in this and can do that for you. Please understand that there is a cost for this service you will need to take into account.
Accounting or Tax Agent Fees
Accountants and tax agents are also in business and as a service business generally charge by the hour for their time. Unfortunately this is something most clients potentially didn’t think about when heading into business. Some accountants or tax agents charge fixed fees, or will provide an estimate on what the fees may be for the first year. This could be anything from say $500 to $4000 for a small business, even more depending on what is involved. There is a process that we as tax agents are required to go through in putting together financial statements and tax returns and whether you were in business for a full year at year end, a month or two, work part time or full time, make a profit or a loss, the process is the same for every job. The amount of time each process takes will differ from client to client but please be prepared for this expense. Do feel free to ask for a fixed price or an estimate of what costs may be for the year so you get an idea of what you may be up for. Just know, you will be up for something, the good news, it is fully tax deductible.
Income tax for the a year is generally due in February the following year (ie year 31st March 2016 tax is due 7th February 2017).
If your residual income tax (RIT – tax owing) is over $2500 then you will become a provisional tax payer and have to pay tax in instalments during the year it is earn’t.
My advice – Depending on the type of business you have, a rule of thumb if you are GST registered is to put 25% of your income or gross profit away and this should cover ACC, income tax and GST. If you are not GST registered, then around 15% should cover it. Doesn’t seem very scientific I know but it works and there is method to the calculations. If you can save it and you don’t have a budget then you will generally be all good to go. If you have a budget, then you would have allowed for that in your budget already and be saving for that as per your figures.
Once your first tax return has been filed then ACC may kick in. You will need to ensure you are on the correct rate, and have the part time / full time information correct with ACC. There default industry code is manufacturing, so you may end up with a much bigger bill than need be. I would recommend speaking to an insurance broker like the team at Zest Brokers. They can have a look at your ACC situation and all of your insurances as a whole and help you come up with the best solution to suit your personal needs. These guys are the experts in this field and their service is free. So why wouldn’t you right?
The other business insurance you may find you will need is public liability and/or professional indemnity depending on your industry. I would suggest contacting a broker to discuss your specific requirements.
Working for families and other benefits
If you receive Working for Families or a type of benefit, your income from your business will have an effect on what you receive.
Do your research
Don’t be afraid to contact Inland Revenue. Too many small business people view Inland Revenue as a bogeyman best left as undisturbed as possible. “Send them money regularly and hope they leave me alone!” seems to be a common attitude. In fact part of Inland Revenue’s job is to offer help and information, particularly for new businesses. You’ll find the Inland Revenue web site very useful for answering your basic questions about setting up a business and by phoning 0800 377 774 you can also arrange to speak to a Business Tax Information Officer. Their web site lists various helpful publications you can order, pick up from your local Inland Revenue office, or download from the site itself. There’s also a good FAQ (Frequently Asked Questions) section. Your tax dollars fund this service, so why not make full use of it? You can ask for free advice even if you’re just thinking about starting a business.
Would you like to discuss your situation? Contact your business adviser, accountants or feel free to contact us for a chat.