Just Started As A Contractor – How Much Should I Save For Tax?
Question: I have just started work and my employer has informed me I am responsible for paying my own tax. Does this require me to put away 20% of my wages? What are my tax responsibilities?
Answer: In this case you’re effectively a self employed contractor – not an employee, so this means you’ll need to put aside some of your gross income to pay your tax later. It’s a good idea to keep this somewhere where it’s unlikely you’ll dip into it, maybe a term deposit account and earn some interest for example. By putting aside 20% from the start you should have enough saved to pay your tax when it falls due. If you’re income goes over $48 000 aim for around 30%-35% to be on the safe side. For higher incomes it would be smart to talk with a tax advisor for more accurate advice for your situation.
Being self-employed you’re able to claim direct costs associated with earning this income- like phone, tools, safety clothing, advertising, stationery, vehicle costs etc – so keep all receipts and invoices for these costs.
Then after the end of the financial year (usually 31 March) you’ll be required to have financial accounts prepared detailing your income and expenses and net profit or loss from your self employed business activities. This profit or loss is then included in your personal income tax return along with any other income you’ve earned and the income tax liability worked out.