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IT Contracting 101

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I have written this article to give you some things to consider and be aware of before starting a career in IT contracting so that you can make an informed decision based on your personal circumstances. 

This is a long article, because there are 7 key considerations you need before you begin as an IT contractor. And then I also added 10 things I wish I’d known before I started – learn from my experience so you don’t make mistakes which are expensive to fix.

I have now been in the IT industry for over 30 years and a large portion (20+ years) has been contracting both here in NZ and in the UK. There are many similarities and equally a few differences between the countries.

At the bottom of this article, I have added some useful links.

Thinking of contracting? 7 things to consider

  1. Finding your first role
  2. Set up a trading business (you will be self-employed)
  3. Tax benefits of contracting
  4. Will I earn more contracting than I do now?
  5. Must I hire an accountant? [yes but …..]
  6. I hate paperwork – give me a hack
  7. How can I find an IT Contracting job – useful sites and networks

Now, on with the detail.

1. Finding your first role

This is normally a hard thing to do, most organisation when they go to the contract market are usually wanting the contractor fairly urgently. This may be down to a number of factors eg resignation leaving a gap in the skills within the team, project need additional boost to complete the delivery in time, funding approved for a ‘short term’ delivery and they need to start ASAP. Either way, leaving a permanent role normally means you have at least 4 week’s notice to provide. Added to that the time it takes to find the role, interview etc it may be too long for the organisation to wait. A couple of options are, build up some annual leave to reduce the time as much as possible or resign and take your chances (not the best option). 

I remember my first contract and was really quite stressed and worried. I had a mortgage; my first contract was 3 months and I wasn’t sure if I was good enough. I was lucky to find and organisation that was willing to wait the months’ notice period. Obviously with hindsight I didn’t need to worry. That first 3-month contract lasted 5 years. However, I wasn’t aware of everything I think would have helped me make the decision.  So, I’m going to try and help in a small way with things to know and consider before making the decision. 

2. Set up a trading business

When it comes to contracting in New Zealand, there are many considerations which contractors should make. One of the most important decisions is determining what type of business structure best suits their needs. There are three primary options for structuring a contractor business in New Zealand: company, sole trader and partnership. 

  • Limited Company structures provide limited liability protection and flexibility to the owners and shareholders, but require more paperwork and involve higher registration costs. Additionally, in New Zealand the attribution rule may serve to eliminate any benefits or flexibility in distributions when working for one main client.
  • Sole traders have fewer reporting requirements than companies and can begin trading quickly; however, they have unlimited tax liability and will be unable to be afforded name protection in New Zealand.
  • In addition, Partnerships can offer two or more people the ability to share ownership as well as split profits or losses; however, all partners will be subject to unlimited liability for debts incurred by the partnership’s activities and you will need to consider the attribution rule and value of work performed by each party for any financial split in order to avoid a challenge from the IRD.

There are Pros and Cons to both of these, and you really need to talk to an accountant for the details. However, in the UK almost every organisation that I worked for required the contractor to be a Limited Company. In NZ there is no such requirement that I have seen yet. For me personally, I feel the sole trader reduces the paperwork required of a limited Co and that is what I have chosen. Again, discuss with an accountant for the details behind each to make your own mind up. 

[Watch Accounting for IT Contractors]

3. Tax Benefits of Contracting

Contracting in New Zealand comes with many benefits and tax deductions. As a contractor, you can take advantage of unique tax deductions that are not available to employees. Certain costs can be deemed ‘tax deductible’ or a portion of the costs can be claimed e.g. the purchase of a PC on which you work, internet and phone costs and some home office expenses. 

Contractors get to deduct all their work-related expenses from their income before they calculate how much tax they owe. 

These deductions can include buying a computer laptop, a printer, a tablet, any software, other subscriptions and equipment used for a contract job, as well as travel costs such as gas, parking fees, meals or accommodation incurred while on the job. Additionally, your insurance premiums related to your contracting business, a portion of your home office costs, mobile phone, internet and other communications costs also qualify as deductible expenses. 

An expert accountant who has experience working with IT Contractor clients can give you guidance at the outset to ensure you claim the maximum and opt for the business structure best for your needs.

In addition to these deductions for individual contractors, If you run a company providing your services through IT contracts may be eligible for corporate tax breaks.

4. Will I earn more contracting?

In theory you also earn more money and can be a little smarter with tax when you switch to contracting from being employed. At the time of writing (2023), the average NZ contractor rate in Auckland is around. $110 per hour or $880 per day. 

If you work 220 days per year (which allows for some unpaid leave and sick days) this gives you an approximate income of $193,000 a year. This sounds great on paper! 

Remember you may also have some time between contracts so a full 220 days may not be achievable in practice every year. You will need to set money aside for living expenses during periods when you aren’t working, are on holiday or sick. 

5. Must I hire an accountant?

You do not need to engage an accountant but they can be very useful advising you in managing your tax, keeping up to date with Inland Revenue filing obligations for GST and Income Tax and ensuring you minimise tax payable on income earned within the  IRD approved guidelines.  

Your circumstances are unique despite the fact that a lot of taxes are the same for all contractors. 

For me, having a good accountant will help you to understand what you can and cannot do within the Inland Revenue rules as well as getting sound advice on how to achieve your financial goals e.g. save for a new car or house. 

6. I hate paper work – give me a hack

If you want to do the least administration and have the simplest overhead then a service like HNRY which can automate your taxes for a fee. HNRY is suitable for sole traders working in New Zealand. See the links below for HNRY and an accountancy firm I use should you wish to go either route. 

7. How can I find an IT Contracting job?

Ways to find information about contracting jobs and finding roles vary. I have found there hasn’t been much information out there to help contractors. The usual suspects to find roles are – 

  • Agencies (of which there are many and varied)
    • They have relationships with organisations and know the business.
    • They charge the organisation a % on top of the rate you receive. 
  • Seek jobs
    • Many other contractors will also see these roles and apply. So competition is high.
    • Can be a slow process as organisations need to sift through many applicants. 
  • TradeMe jobs
    • Same as Seek.
  • Direct personal network
    • Usually a good option as you are known and often quicker and cheaper i.e. there is no intermediary cost to the employer if they hire you direct without an advert or an agency.
  • Making yourself visible as open for work on LinkedIn – here’s how to do it.
  • Resourcefully.io – a novel way for organisations to search and connect with you directly. 
  • Meetup Groups – like-minded individuals who can share information. I started the IT Contractors Meetup Group.

Ten Things I Wish I Had Known 

Things to be aware of that I wish I had known before I started contracting, in no particular order are: 

  • You do not receive any employee benefits when contracting. Private medical insurance, Employee Assistance Programmes (EAP) and insurances are some of the benefits you may receive as an employee which have a value associated with them. Lots of organisations offer some of these and they may also have negotiated a significant discount. Therefore, you cannot compare what you pay now for these services as a permanent member of staff and assume the cost will be the same when you are a contractor. Of course, you may also receive and possibly pay for some benefits that you don’t need. Before you leave full time employment, get quotes for any benefits you feel you need. You need to buy these yourself and they may not be tax deductible. Again, your personal circumstances dictate which you want/need. 
  • A lot of, if not all, organisations do insist on indemnity insurance and so this will be something you need to have once you have landed yourself a contract. Research the costs.
  • ACC is another cost to be aware of. As a permanent employee your ACC contributions will be taken care by your employer, but as an independent contractor you have to pay these. There are ways to make this more efficient and so again, I would suggest discussing this with an accountant. 
  • Annual leave and sick leave will not be paid but on the other hand, you do not have restrictions on how many days leave you take. I know many contractors who work for a period of time then take a good long time off to travel or pursue some other interest. Usually when you are working as a contractor there is a timeline in which to deliver the project (one of the reasons for you being hired) and so personal holiday leave can be difficult to take if there are tight deadlines. 
  • Whether you choose to be a Sole Trader or a Limited Company, you will need to do a certain amount of paperwork. You need to file your tax, keep records of your costs and spending, you will probably have to register for GST (Goods and Services Tax) and pay that either bi-monthly or six monthly on a payments or accrual basis. 
  • One of the key differences I have seen between the UK and NZ is the tax system. Here in NZ, you need to pay provisional tax or tax for your upcoming next financial year in advance based on your previous income. In the UK, you earn the income and the tax is calculated and paid afterwards. Personally, I prefer the UK system, but it is what it is. The links below include Government tax information.
  • Your first year contracting in New Zealand can be a tax minefield. Because you have previously been employed on a PAYE (pay as you earn) tax basis, your first year of contracting income will not be treated in the same way. Paying tax in advance when your self-employed income from the prior year was $0 means you could end up paying tax on last year’s income and an additional 105% in the second year because in the second year you are assessed for provisional tax based on your earnings for the first year. To assist with the transition it is recommended that you seek advice from a professional, such as an accountant or tax professional, who can help you understand your obligations and ensure that you are compliant with the tax laws in New Zealand. They can assist you with calculating your estimated tax payments and advise you on the best way to manage your tax affairs. It may also be beneficial to familiarise yourself with the tax laws and regulations in New Zealand, including the tax rates and thresholds for self-employed individuals, as well as the types of expenses that can be claimed as deductions. This will give you a better understanding of your tax obligations and help you to make informed decisions about your finances. It is wise to set aside your likely income tax in a separate bank account every month – you can ask your accountant to estimate. 
  • Keeping your skills relevant and trained is one of the areas I feel contractors do fall foul of. As a contractor you normally pitch yourself as a particular role and then get known for that role. It usually costs money to do training, along with days off to do the training. This deters many contractors from up-skilling themselves. Some perceive training as a big expense which lots of contractors decide not to do. I recommend factoring in some training and up-skilling in your calculations. It is very unlikely an employer will pay for you to do any of this as well as paying your hourly/daily rate. And we all know that skills in demand change over time – you can’t afford to get left behind.
  • What rate to charge can be a difficult question. You need to know what the average rate for your role is and you may be tempted to charge less in order to land your first role. My suggestion is to ask around and don’t go in low. You have a worth to the organisation/project and when it comes to renewal it makes it more difficult to increase your fees to the right rate if you find you have undersold yourself. When you ask, many people might not divulge their personal rate but they may indicate what the rates are like for your role and experience. You could also ask or research agencies, Seek, TradeMe and Resourcefully.io (links listed below).
  • The tenth thing is community. I wish there had been a friendly group of people to support me during the transition. I would have worried less and had more confidence. Fortunately, now there is – the Resourcefully community links below for where to find us.

Useful Links

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