Nearly 300,000 Kiwis are self-employed. Photo / 123rf
Nearly 300,000 Kiwis are self-employed. Photo / 123rf
Opinion by Diana Clement
Diana Clement is a freelance journalist who has written a column for the Herald since 2004. Before that, she was personal finance editor for the Sunday Business (now The Business) newspaper in London.
Being self-employed in New Zealand presents challenges such as no automatic KiwiSaver, holiday pay or sick leave.
Accountants recommend budgeting, cashflow forecasting and spending $200 to $300 on initial advice.
Contributing to KiwiSaver and managing personal expenses can help build long-term financial stability.
No employer, no automatic KiwiSaver, no holiday pay, no sick leave. Just you, your income and the financial juggle. Ouch. Being self-employed comes with some real challenges.
Nearly 300,000 Kiwis are self-employed, such as small business owners and freelancers. Some will lurch from one financial crisis to thenext.
Who doesn’t know the self-employed person who has no money left to pay their tax, ACC and other non-negotiables? Accountants see it all the time.
Personal budgeting, cashflow forecasting, saving for tax, and using professional advisers is a good start.
Garreth Collard of EpsomTax.com recommends newly self-employed people spend $200 to $300 on initial advice from an accountant. It’s likely to save them money in the long run.
That will cover questions such as whether you should be self-employed or start a company, and the pros and cons of registering for GST. You’ll learn about provisional tax and alternatives such as the accounting income method, which can help new businesses.
An accountant can talk you through your business plan and what you can and can’t claim as expenses. “Sometimes having a professional to bounce ideas around with is invaluable,” Collard said.
Mistakes abound. Collard often sees newbies falling for the Ford Ranger trap, where they spend too much on plant and equipment or, as is common, the double-cab ute. “Now they’re $80,000 in debt, but what if the income doesn’t come in to pay that? You’re much better to set your sights lower.”
They also may not manage personal expenses well. Even daily lunches add up when the cashflow isn’t there.
“It’s different later,” Collard said. “But even then, once funds are flying freely, you should still carefully calculate.”
As well as dropping a few hundred dollars on an accountant, using software such as MYOB, Xero or HNRY saves time that can be used to work on the business, Collard said.
If you don’t use an accountant, at least calculate your post-expense income, then put aside a percentage for tax and ACC. Look into the Accounting Income Method (AIM), which spreads out payments. Your accountant can tell you about tax pooling, which can help with big tax bills.
Give yourself time to work on your business, not just in it, and to get insurance, Tim Fairbrother, financial adviser at Rival Wealth, said.
Self-employed people will most likely need public liability cover to pay for accidental damage to third-party property. Some professionals need professional indemnity cover, which pays out if they’re negligent.
Look at ACC CoverPlus Extra, which pays an agreed sum if the self-employed have an accident. Many earn little on paper, and regular ACC would only pay a percentage of that.
Check with your adviser if mortgage or income protection cover you already have is still fit for purpose. There can be hidden pitfalls, Fairbrother said.
On the personal side, if you have spare cash, concentrate on paying down your mortgage, as mortgages are not tax-efficient, Fairbrother said. Pay off credit cards and other bad debt if you want to build wealth and equity, he said.
“An investment portfolio should be the last step once this non-tax-efficient debt is gone and you have surplus to save each month instead of mortgage payments.”
Buying the building you work from is sometimes a way to build wealth, he added.
Booster’s chief executive argues that KiwiSaver is an easy way to build savings. Photo / NZME
KiwiSaver is a slightly different question. National Capital’s founder Clive Fernandes said most self-employed New Zealanders contribute minimally to KiwiSaver, if at all.
Contributing the minimum $1,042.86 annually to secure the $260.72 Government contribution, alongside potential long-term growth, remains a smart move for those who can afford to lock away funds, he said.
Booster’s chief executive Diana Papadopoulos, however, argues that KiwiSaver is an easy way to build savings. Any money put in will be boosted by the Government’s contribution and the returns.
“When you are self-employed, it can be hard to look past the next job,” Papadopoulos said. “If you want more than a basic existence [when you ease back], you will need to have some savings.”
She added that the money’s locked up, but that can stop you being tempted to dip in. “That means you make the most of compounding returns and your money can really grow.”
Set up a regular payment, she said. “It might be small, but every little bit counts.”
Whew. That’s a lot to take in. Being your own boss means being boss of your own money. Your future self will thank you if you can get on top of this.
