Changes to tax deducted from payments to contractors

When announced in the Budget last year this change appeared to be about allowing contractors to choose their own withholding tax rate – within limits.

But as they say the devil is in the detail.

In a nutshell, if you are invoicing an IT services or recruitment company for your contract services then the IT services or recruitment company will be required to deduct withholding tax from all payments to you from 1 April 2017 (even for March 2017 work paid in April). And the default rate is 45%. The new change is that it now affects those contracting through companies.

Sole traders:

If you’re a sole trader the 45% will cover more than your usual tax obligations as the top tax rate is 33% so after you claim your business expenses then you should receive a sizeable tax refund. But you’ll have to wait till year end to receive it.

Details are at http://www.ird.govt.nz/news-updates/contractor-changes.html.

To reduce the amount being deducted you can complete an IR330C form: http://www.ird.govt.nz/resources/9/c/9c019ad0-9071-4f3d-babb-7aa37e954bb4/IR330C.pdf but the minimum rate you can choose is 10%. The 10% is probably the best option but you may then have tax to pay at year end if that rate ends up being too low . You can calculate a more accurate rate using the IRD calculator at http://www.ird.govt.nz/calculators/tool-name/tools-t/tax-rate-estimation-tool-contractors.html. For example:

  • If your income after expenses and excluding GST is around $80,000 then the rate should be 22%.
  • If your income is around $100,000 then the rate should be 24%.
  • If your income is $200,000 then the rate should be 28%.
  • etc;

Remember by using a 10% rate you are deferring the tax you pay, but you end up paying the correct amount of tax based on your earnings in the end.

The other option is to complete an IR23BS. This is a complicated form but will potentially allow you to set the rate that the IT services or recruitment company charges to an even lower rate, depending on your costs and tax losses from other business activities for example, if you have a rental property with large losses.

http://www.ird.govt.nz/forms-guides/number/forms-001-99/ir023bs-form-special-taxcode.html

If you are a sole trader and already have a certificate of exemption from withholding tax that exemption will expire at 31 March 2018.

Companies:

It all becomes far more complicated if you provide your contract services through a company. By the intermediary recruitment or IT services firm deducting withholding tax, this reduces the amount paid to your company. Effectively then because of the personal services attribution rules the income will be allocated to you at year end but the tax will already have been mostly paid by your company. Meanwhile you still need to pay PAYE during the year on your salary (or provisional tax) and the company will receive a large refund at year end.
Because this doesn’t make sense you can choose a lower withholding tax rate for the company by completing an IR23BS in the company name and setting the withholding tax rate to zero. Otherwise the IT services or recruitment company can deduct tax at 45%.

Special tax code application (IR23BS): http://www.ird.govt.nz/forms-guides/number/forms-001-99/ir023bs-form-special-taxcode.html

The only other way to reduce the compliance costs of all this extra work and to minimise the real cashflow issues is for you to contract in your own name for those jobs that go through a recruitment or IT services company and just use the company for contracts you obtain directly. And you should expect to pay higher monthly fees to your IT services or recruitment company to cover their additional compliance costs. If the recruitment agency isn’t quite ready to implement these changes, they do have up until 1 July to get their systems set up which may delay things a little for you.

Example: IT Recruitment Co Ltd has agreed to provide web designers for Client Co. IT Recruitment Co arranges for Services Provider Ltd to provide people for Client Co. IT Recruitment Co Ltd is arranging people to provide work directly to clients. As a result, they are in a labour-hire arrangement and this labour-hire arrangement is part of their labour-hire business. As a result IT Recruitment Co Ltd is required to withhold tax at 45% from any payment made to Services Provider Ltd. Services Provider Ltd may apply for a special tax code to reduce its rate of withholding (including applying for a rate of 0%).

 

Getting paid faster

Reprinted from our April 2016 newsletter!

Cash flow is critical for small businesses and one of the best ways you can maximise your cash flow is to get paid faster and leave less sitting there in unpaid invoices you have issued.

Currently the average time it takes for a small business to get paid is around 40 days, although for business using Xero for invoicing this is less, closer to 30 days. That is consistent with what we experience.

getting paid

There are some simple things you can do to get paid faster:

  1. No surprises. Make sure your client knows what it will cost up front and when you will do the work.
  2. Invoice as you go rather than once a month. If you have finished the job then send the invoice while it is fresh in your, and the clients mind.
  3. Date your invoices appropriately. Larger organisations and government departments tend to pay on the 20th of the month after your invoice date, so using 30 April as an invoice date could result in you being paid a month earlier than if you used 1 May as the date.
  4. Make it easy for your clients to pay. Make sure you bank account number and payment instructions are easy to find on your invoices. With Xero it is straight forward to connect a payments gateway to take online payments.
  5. Regularly follow up your overdue invoices. You can use aged receivables reports or in Xero the Overdue invoices dashboard to see at a glance who is overdue. In Xero you can set automatically emailed invoice reminders triggered when an invoice becomes nearly due or overdue. For some clients though a phone call may work best. Around the 23rd of the month is a good time to follow up the overdue invoices as a lot of businesses have invoice runs that pay on the 20th.

In Xero you can add the accounts receivable days to your business performance dashboard to track how you are going.

business performance

Seminar Series – October 2015

We are running the following three FREE lunchtime seminars:

 

Seminar 1: The key numbers for your business
Tuesday 6 October 12:15 – 1:15 pm  – this seminar covers the following:

  • Accruals vs cashflow
  • How to get your money out of your business – drawings, dividends, salary
  • Shareholder current accounts –  drawings and funds introduced, what they mean and how they work
  • What can the financial statements tell you?
  • Effect of closing stock figures
  • Key ratios e.g. debtor days, gross profit
  • Effects of small movements
  • How to increase your income without working more – the power of leverage, claiming all costs etc

 

 

 

Seminar 2: Your Personal Finances
Tuesday 13 October 12:15 – 1:15 pm – this seminar covers the following:

  • Your approach / personality
  • Types of investment
  • How to get ahead
  • Budgeting – does it work?
  • Reducing your mortgage
  • Where to from here?

 

 

 

Seminar 3: Xero Update
Tuesday 20 October 12:15 – 1:15 pm – this seminar covers the following:

  • Using Xero to claim expenses paid for personally
  • On charging expenses to clients
  • Find and Recode
  • Inventory
  • Payroll
  • Repeating invoices, email templates and email reminders

 

Your presenters:

 
Baubre Murray FCA – Director of Dowse Murray Chartered Accountants – an accountant with more than 25 years experience working with business owners.

Martin Dowse BSC (Hons) – Technology specialist with more than 25 years experience working with technology systems

All seminars are being held at Level 1, 166 Featherston Street.  Note that this is in the meeting rooms on the first floor of our building, not in our own office.

Bring a friend but please RSVP as soon as possible as we have only a limited number of seats for each seminar.

RSVP by email to martin@dowsemurray.co.nz or phone us on 04 971-1600.

Looking forward to seeing you!

A really easy way to record and claim expenses in Xero

Xero is great – we are big fans of it here! But some bits are not quite as great as others, and the expense claims in Xero in particular have less greatness. They work but they are long winded, easy to get wrong and hard to fix if you do get it wrong. However the Xero app for iPhone/Android does have a neat feature where you can photograph a receipt and attach it to an expense claim all in one go so it is still tempting to use expense claims.

If you don’t need the create/submit/approve/authorise/pay workflow wrapped around expense claims then there is a better way. Really fast, really easy.

For any of our small business clients with a version of Xero that has invoicing (i.e. not the cashbook version you can only get through accountants) we recommend they use a accounts payable invoice (aka bill) to record expenses they pay for personally and then “pay” it from funds introduced as detailed in our FAQ here.

You can drive this all from your phone very easily, all you do is snap a photo of any receipt(s) you want to claim and email the photo to the unique “files” email address each Xero organisation has – set your Xero files address up as a contact on your phone first.

files

When the email arrives the attachment is automagically saved into an files inbox in Xero. Then when you have a bit of time and want to process your expenses you logon to Xero, go to the files inbox, tick all the photos of receipts sitting there and take the option to Add to new / Bill.

inbox

 

Complete the bill using the handy preview of each receipt on the left and making sure it is set to be tax inclusive.

bill

Then the last step is to approve it and pay it from Funds Introduced.

paid

I process my receipts every two months when I do the GST return, dating the bill and payment the last day of the GST period to make sure it is included in the return.

If you don’t have a version of Xero with invoicing then there is an option to create a spend money transaction instead of a bill – you would need to set up a dummy Petty Cash bank account in Xero and periodically clear it out by doing a receive money from Funds Introduced but it should still be pretty quick to do.

 

What is the best payroll system for small businesses in New Zealand?

We have had a number of clients call us lately asking if they should be looking at using Xero Payroll so I thought it about time that I summarised what I have been telling them in one relatively concise post. If you want more detail contact us.

With sick pay, holiday pay, termination pay, PAYE, student loans, and Kiwisaver deductions payroll can be a very complicated thing and if you get it wrong and miss a payment to IRD you are looking at a $250 late payment penalty plus the hassle of fixing up the mess. So using the right payroll system can save you a lot of time and gnashing of teeth.

Broadly the choices are:

  1. Do it all manually using the IRD calculators
  2. Use a DIY payroll system that does the calculations for you and tells you how much to pay your staff and IRD – Xero payroll falls into this category
  3. Use a full service payroll provider that does it all for you
  4. Thankyou payroll

Manual payroll 

You use the IRD calculators to figure out how much you pay your staff and what you need to pay IRD for PAYE etc; You pay your staff and on the 20th of the next month you pay IRD the PAYE, and file with them two forms, the IR345 employer deductions form and IR348 employer monthly schedule. If you have a login to IRD’s myIR you can file these electronically.

DIY payroll

There are a number of desktop and online systems here of which Xero is one. The systems provide a workflow that helps you manage paying staff and a calculator that works out how much you pay your staff and IRD, and what you to put in the IR345 and IR348 forms. Some of these payroll systems (e.g. Xero) also provide export files that you can upload to myIR for the IR 345 and IR348 forms, and batch files you can upload to the bank to pay your staff and IRD.

Xero Payroll is a good online full feature DIY payroll and getting better all the time. Another good option is Flexitime, with Flexitime you do get the option of allowing them to manage your PAYE filing and payments if you want.

Full service payroll

Now things start to get easy. When you sign up with a full service payroll provider you give them direct debit authority to your bank account. You fill in or check the time sheets for the employees and authorise the pay and the payroll provider does the rest. They direct debit the full amount of the pay from you on the due date and pay the staff. On the 20th of the next month they pay IRD (having already taken the PAYE $ from your account when the pay went out) and file the IR345 and IR348 forms for you at IRD.

We use and recommend online providers Smartpayroll and iPayroll.

Thankyou payroll

Thankyou Payroll gets a category of its own as it is just a little bit different.  It is very like a full service payroll except rather than direct debiting the full pay amount from your bank account you make the payment to Thankyou payroll each pay period. They still do the form filling and paying IRD. Updated: There is also a direct debit option, see Hugh’s comment below.

So which payroll is right for you and what will it cost?

The short answer is an online full service payroll or Thankyou Payroll are the best, and the best value, and these are the ones you should look at.

Manual payroll costs nothing but your time (and any penalty payments if you get it wrong). If you pay one or two people on salary and you do it via AP (same amounts each month) and you have a good 20ths of the month process and you always file things on time with IRD and you love doing paperwork then this is the payroll system for you.

Xero payroll is interesting but it still needs you to do the uploading and paying.  You can add payroll to starter, standard or premium plans for $10 for the first user per month, and $1 per month per extra user (all plus GST). At the time of writing this Xero don’t have a dedicated payroll helpdesk, if you need help it is via email to their normal helpdesk.

Who should use Xero payroll? If you have Xero already, and really want to hang onto your PAYE $ until the last possible minute, and you are disciplined about filing and paying IRD on time then Xero payroll is a good option.

If you are considering Xero payroll also look at Flexitime. There is a comparable basic $10 per month plus $1 per employee per month (up to 10 employees) plan with email support, or $20/$2 with telephone and email support and more features.

Full service payrolls are definitely the easiest and least risk. They do it for all you, no risk of missing payments to IRD. For Smartpayroll and iPayroll it will cost you around $25 – $35 a month for up to 10 employees. They also have very good email and telephone support help desks – invaluable if you have to work out termination pays or anything out of the ordinary. They also integrate with Xero.

Who should use a full service payroll? Anyone who has to pay staff should. They easily pay for themselves in the time they save you, even at minimum wages.

But there is more – Thankyou payroll is very close to being a full service payroll and it is free. The catch is that you have to transfer/DD the full pay to them three days before it gets paid, so they hang onto your money for a bit longer. If you are a charity, or donate regularly to one, or pay a small fee, then you can get next day payroll processing. Thankyou payroll also have a helpdesk.

Who should use Thankyou payroll? If you pay staff it is worth a look – the price is right and we have had good feedback from clients of our using it.

thankyou

1 2 3 5