How do I know if I need to file a tax return before July 7?
In the past few years, the ways that people work and earn have changed significantly. There has been a huge rise in freelancing; organisations are seeing the big advantages of bringing in staff ondemand; there has been a surge in online platforms where individuals can earn an income. More and more Kiwis are earning income without having to be a permanent or salaried employee.
At the same time, we are being told that filing tax returns has never been easier. IRD’s advertising tells people they don’t need to file their own tax returns any more – it all gets done ‘‘automatically’’ now. This is not quite true for everyone though.
Did you know that if you have earned any income outside a permanent or salary job (a job where your employer deducts and pays all your taxes for you), between April 1, 2019, and March 31, 2020, you probably need to file an IR3 individual tax return by July 7? And that if you don’t do this you risk financial penalties?
While Inland Revenue has undoubtedly made things a lot easier for those whose only source of income is salaried employment, it has been a really confusing time for the 20 per cent of Kiwis who earn income outside salaried work – the independent earners such as freelancers, contractors, sole traders and gig workers. There have been mixed messages leading to real uncertainty as to whether they are actually required to file an individual tax return any more.
We are finding almost 32 per cent of the independent earners who come to us bring a legacy of unpaid or unfiled tax returns – even those that have previously had professional support.
They don’t realise what their obligations are and that if they have earned even part of their income independently in the last tax year, they will need to file a tax return by July 7.
You will be required to file a return even in situations where you might have been working for a client that deducted withholding tax from your pay.
Withholding tax is specific to independent sole traders, freelancers and contractors, and simply contributes the first part of your income tax to IRD. However, many independent earners mistakenly believe all their tax obligations have been met.
However, a tax return will still need to be filed, and there will always be further tax to pay on top of what has already been contributed, as withholding tax does not cover things like ACC, student loan contributions, or GST if applicable.
Adding to the confusion, it is highly likely that whatever rate of withholding tax you have asked your client to deduct from you throughout the year has been incorrect. Individuals are asked to choose their own rate of deduction and most tend to choose percentages of nice, round numbers like 20 per cent, however tax rates are not that simple – so at the end of the year you will almost certainly have overpaid or underpaid your income tax.
This all leads to stress and anxiety for independent earners at this time of year, particularly those in their first year of self-employment. Anyone who has only recently started earning income independently may not be aware of their responsibilities and could mistakenly believe that everything gets taken care of automatically these days.
Worse still, those new to independent earning who earn alongside a permanent or salary job may find that IRD’s new system has automatically generated and filed a tax return for them already – with IRD unaware any additional independent income needs to be declared.
In these scenarios, the individual will need to amend their return with IRD, to include the correct income and expenditure information, and then refile it, and pay back any refunds they may have incorrectly received. Many individuals won’t be comfortable doing this themselves, for fear of getting it wrong. For individuals, the tax and compliance requirements can be confusing, and often the information available online is only relevant for those running businesses as a registered company, rather than for sole traders.
Unfortunately, there is still a misconception in New Zealand that it is a requirement to register a company if you wish to earn income outside a permanent job. This is not correct, and the Ministry of Business, Innovation and Employment is working hard to show Kiwis that for individuals, registering a company may result in unnecessary stress, hassle and cost, compared with operating as a sole trader. Given that the tax rates for individuals are generally the same, regardless of whether you earn the money directly or pass it through a company first, for many individuals there is no need to operate as a company at all.
Between the mixed messages, the confusing tax deductions, and the added complication of unnecessarily operating as a company, it is no wonder we are seeing so many freelancers, contractors, sole traders and independent earners coming to us with tax tangles.
The penalties for getting things wrong or not paying on time can be severe too. If you are someone who earns any form of income outside of permanent or salaried employment, tax returns are not to be ignored – regardless of what you might have heard. The good news is, though, that even if you have found yourself with tax concerns caused by misunderstanding the requirements, they can be fixed.
James Fuller is the chief executive of Hnry – a pay-as-you go accounting service tailored for independent earners.